Public Bill Committee

[Mr. Joe Benton in the Chair]

Amendment proposed (this day ): 37, in clause 1, page 1, line 12, at end add
(c) where appropriate, direct the relevant authorities to act in accordance with the powers available to them under the relevant legislation..(Mr. Hoban.)

Question again proposed, That the amendment be made.

Joe Benton: I remind the Committee that with this we are discussing the following: amendment 36, in clause 1, page 2, line 8, after Council, insert
( ) specify the responsibilities of each member of the Council in protecting or enhancing the stability of the UK financial system;
( ) specify the powers each member of the Council is able to exercise in protecting or enhancing the stability of the system;.
Amendment 38, in clause 4, page 3, line 31, at end add
the relevant legislation means for the Financial Services Authority, the Financial Services and Markets Act 2000 and for the Bank of England, the Banking Act 2009..
New clause 2Identification of additional powers needed to fulfil responsibilities for financial stability
The Treasury must lay a report setting out the powers that the Financial Services Authority and the Bank of England need to fulfil their responsibilities for financial stability under the relevant legislation within one year of the commencement of this Act..

Ian Pearson: I wish you a happy new year, Mr. Benton. It is a pleasure to serve under your chairmanship this afternoon.
If I remember my train of thought correctly, I was making some broad initial comments about performance, responsibility and structure and I wanted to refer to some of the comments made by the hon. Member for Chichester. It is not that long after the festive season, so I hope that he will forgive me for using a certain rather hackneyed phrase. Quoting the British Bankers Association on who has responsibility for the failure of the banks is a bit like asking turkeys to vote for Christmas. The quotes that he read out completely ignored the responsibilities of the banks, their boards and their shareholders.
As my hon. Friend the Member for Wolverhampton, South-West rightly said, the tripartite system works very well in Canada. As I have been at pains to point out, we all have lessons to learn from the global financial crisis and the way in which regulation has operated, which is why there have been extensive international discussions. After careful consideration, the Government concluded that the existing structure of international co-operation is the right one. A different model would not have helped to avoid the crisis.
It is not the Government, but the Opposition who are being driven by political expediency. They argue that the wrong system of regulation has been introduced because they want to place the blame on the Prime Minister, who was the architect of the tripartite system when he was Chancellor of the Exchequer. However, that system has been widely copied, and a different model would not have averted the crisis.
Let me set out why the Government are introducing the Council for Financial Stability and why it will make an important contribution to improving financial stability arrangements. I will then address the points that hon. Members made this morning.
At present, a standing committee of the Treasury, the Bank of England and the Financial Services Authority is established under a memorandum of understanding. The committee serves as a forum for the discussion and co-ordination of the activities of the authorities to protect financial stability. To date, the committee has played a key role in co-ordinating the authorities response to the crisis.
Meetings of the Chancellor of the Exchequer, the Governor of the Bank of England and the chairman of the FSA have guided and co-ordinated the overall strategy, supported by meetings at an official level. Managing the successive stages of the financial crisis has required the authorities to work intensively and closely, with the standing committee meeting regularly at official level. At peak times, the Committee met daily, with work at official level proceeding continuously.
In the early stages of the financial crisis, beginning with the liquidity problems faced by Northern Rock and the subsequent run on its deposits, the financial crisis management arrangements put in place in 1997 were, as the hon. Member for Chichester rightly said, severely tested for the first time. A lot has been said about the performance of the tripartite arrangements, and I do not pretend that there was not room for improvementindeed, lessons have been learned.
Several members of the Treasury Committee are on this Committee, and their report The run on the Rock, which was published in January 2008, is perhaps the most extensive and significant report on this episode, and the Government responded in July 2008. I want to highlight a few key points in response to those who say that Northern Rock is an indication that the tripartite arrangements do not work.
Let me make four brief points. First, no retail depositor lost any money as a result of the problems experienced by Northern Rock. The Government stepped in to provide depositors with the confidence that they required to stabilise the bank. We eventually took the bank into temporary public ownership, using emergency powers once it became clear that that was the best option in terms of value for money for the taxpayer and financial stability.
Secondly, once it became apparent that the authorities did not have all the appropriate tools to resolve the issues raised by a failing bank in a way that protected depositors, taxpayers and financial stability, we put in place emergency powers through the Banking (Special Provisions) Act 2008. That measure was opposed by the Conservative party, but it played an important role in ensuring that the authorities had the tools that they required. We then developed a permanent resolution framework that was implemented through the Banking Act 2009. The hon. Member for Fareham and I both served on the Committee that scrutinised that Bill before it was passed, as did a number of other hon. Members who are here today.
Thirdly, the authorities used these powers to resolve difficulties experienced by other deposit-takers, using the Banking (Special Provisions) Act in the case of Bradford & Bingley in October 2008 and the Banking Act 2009 to resolve the issue of the Dunfermline building society in March 2009. I want to stress the point that these actions again showed that the authorities were applying their new toolkit decisively and effectively, to protect depositors, financial stability and the interests of taxpayers.
Fourthly, the crisis was not just about the potential future of individual institutions. As has already been referred to, by mid-September 2008, with the loss of confidence in the global financial situation, which was particularly engendered by the failure of Lehman Brothers, the whole global financial system was on the brink of collapse. Our response to that potential disaster provided a blueprint for other nations to follow. Again, I think that that has been widely recognised by financial commentators.
The UK authorities took immediate action to stabilise the system, for example through the recapitalisation of the banks, the establishment of the Bank of Englands credit guarantee scheme and the announcement of an asset protection scheme to insure banks against future losses. That showed the tripartite authorities working together at their most effective level.

Mark Hoban: The Minister has given a great litany of things that the tripartite committee did after the system collapsed. How many times did the Governor of the Bank of England, the Chancellor and the chairman of the Financial Services Authority meet prior to the collapse of Northern Rock in 2007?

Ian Pearson: I am not saying that everything that the authorities did before the global financial crisis or indeed in response to it has been perfect in every way. Particularly with the benefit of hindsight, it is always possible to think of ways in which the operation of those arrangements could have been improved; indeed, that is what parts of this Bill are deliberately designed to achieve. However, the hon. Gentleman surely must recognise that the measures that we have taken to resolve problems once the global financial crisis hitwith regard to Northern Rock, the Banking (Special Provisions) Act, the Banking Act 2009 itself and the measures on recapitalisationare all measures whereby the tripartite authorities worked together to solve some very difficult situations.

Mark Hoban: How many times did the tripartite committee meet prior to the collapse of Northern Rock?

Ian Pearson: My hon. Friend the Member for Wolverhampton, South-West says from a sedentary position, Probably not enough. I hear what he says in that regard.
However, the point that I want to make to the Committee, which is one that the hon. Member for Chichester must also address as he keeps coming back to his mantra about who is in chargeI will say a bit more about that in a momentis that pretty much every advanced nation has a system of regulation that follows a broadly tripartite model. We can discuss some of the changes that have been recently announced in the United States, if hon. Members want. Nevertheless, it is a system that is established and, as a number of Members of the Committee have rightly pointed out, we should not only look at structures to ensure that they are appropriate but at the performance of the tripartite regime too.
I believe that we have genuinely learned lessons. As part of that learning process, we fundamentally examined whether different structures would be more appropriate. Our considered view, which we expressed in Reforming financial markets, is that the tripartite regime is the most appropriate one and we do not think that a different regime, if it had been implemented before the financial crisis, would have made any significant difference in terms of how that crisis was handled.
The matters are ones of judgment and of the right people getting together and making those judgments. When I come on to discuss some of the amendments, we can expose the differences between the approach that we want, which we propose through the Council for Financial Stability, and the approach of the Conservative party, which is not in the best interests of UK customers or of financial stability.

Andrew Love: Every contribution to the debate has prayed in aid the Treasury Committee report The run on the Rock. I do so myself. It is the most comprehensive document to look specifically at that issue. However, nowhere in that document will you find any reference to the big bang change in regulation being suggested by the Opposition. Indeed, the report went out of its way to say that we ought to keep our regulatory arrangementsperhaps we disagreed with the Treasury about how exactly that should be done, but we certainly did not go for any of the more radical suggestions made by some. We ourselves prayed in aid the continuation of the tripartiteif I can call it thatregulatory system.

Ian Pearson: My hon. Friend is absolutely right. I welcome the fact that the Treasury Committee, after a thorough analysis of the situation, took the view that the tripartite system was and remains the most appropriate, even though the Committee recommended improvements. I am trying to put some of the criticisms made of the tripartite system into perspective. It is always possible to focus on what has not gone well. As I said, there is no room for complacencylessons have been learnt. We should always be prepared to consider whether more lessons need to be taken on board.
What is also important is considering what has worked well, so that we do not end up throwing the baby out with the bathwater. The response of the tripartite authorities and the decision to legislate, through the Banking (Special Provisions) Act and the Banking Act 2009, show the tripartite authorities getting together, discussing how we handle situations and what powers and responsibilities are needed, and coming up with actions that make sure we have the tools required for the future.

Mark Hoban: The Minister gives the impression that all is sweetness and light among the tripartite authorities now but, if they are all agreed on the responsibilities and powers, why is it that time and time again the Governor of the Bank of England comes back to the fact that he has not been told what powers he has to maintain financial stability?

Ian Pearson: The tripartite authorities have discussed such matters, as the hon. Gentleman is very well aware, extensively over recent months, leading to the production of Reforming financial markets last year, in which the Government took a view of the financial crisis and identified the reforms needed to strengthen the financial system for the future. We consulted on that and the Bank of England and the FSA input to the consultation process and, indeed, to the process producing the White Paper in the first place. As a result of such discussions, we decided that we wanted to improve the standing committee arrangements. When we evaluated the standing committee and the wider tripartite arrangements, we took the view that while many different institutional frameworks exist in different countries across the world, that model of tripartite financial regulation was successful and remained appropriate.

Mark Hoban: Will the Minister give way?

Ian Pearson: Just let me make a bit more progress, then I shall happily give way.
Our position is that what the regulators do and the judgments they exercise matter as much if not more than the institutional framework within which they operate. We need a central bank, a regulator and an economics Ministry, but moving specific responsibilities from one body to another will not by itself make any difference other than to cause significant disruption at a time when attention should surely be focused on practical, workable improvements to regulatory performance and decision making, which is what the Government want to ensure. It is a point that my hon. Friend the Member for South Derbyshire has made on a number of occasions, which is why I happily give way to him.

Mark Todd: I shall not make that point again. Instead, I wish to remark upon the fact that it would increase the confidence of those hon. Members considering the Bill if the White Paper, the precursor to the Bill, had more obviously engaged the Bank of England. One concern to which the Select Committee drew attention was the obvious disconnect between the Governor of the Bank of England and the process that we are now discussing. It would have been helpful, when considering the functioning of the tripartite authority, if there had been a greater degree of collegial spirit in the way in which the Bank responded to the future regulatory framework opportunities.

Ian Pearson: I do not want my hon. Friend to think that there were no significant discussions between officials from the Treasury, the Bank of England and the Financial Services Authority in the run up to producing the White Paper, because there clearly were. As is often the case when producing documents, not everybody will agree on every single line or every item. A thorough process took place, and I hope that my hon. Friend recognises the fact.

Tom Watson: In an earlier contribution, the hon. Member for Chichester declared this clause to be the most important and most serious in the Bill. However, we heard an uncharacteristic outburst of hubris from the hon. Member for Fareham when he declared the outcome of the next general election, saying that he would not bother to put his alternative to the Committee but would wait until then.
Given the hon. Gentlemans continued assault on tripartism, is my hon. Friend surprised that the hon. Gentleman has not bothered to put forward an alternative? If the hon. Gentleman wishes to interrupt the Minister every 30 seconds, detaining the Committee as a result, would he at least detain us by giving an alternative rather than making the same argument over and over again?

Ian Pearson: It is fundamentally important that we focus on making practical improvements to regulatory performance and decision making.
I was saying that, in any system, there will be a central bank, a financial regulator and an economics Ministry. The key thing is getting them to work together in the best interests of the economy and for financial stability. Whether one is in the United Kingdom, the United States or any other country, we all face the same sort of situation. Simply moving the deckchairs around into different formulations does not mean that we can escape the fact that we need those three organisations to work together.
I shall come to the detail of the amendment of the hon. Member for Fareham in a moment, but it is nonsense to say that one body should have sole charge. None the less, there is potential to improve the tripartite model, which is why we produced the White Paper, why we consulted on it, and why we are here today debating clause 1 and the other clauses that relate to the Council for Financial Stability. We want the council to replace the tripartite standing committee. Its membership will comprise the Chancellor, acting as chairman, the Governor of the Bank of England and the chairman of the FSA. It will be responsible for considering emerging risks to the UKs financial stability and the global financial system, and co-ordinating an appropriate response.
I shall describe in detail how it will differ from existing arrangements, which I hope will clarify matters for the hon. Member for Chichester. On one hand, he said that this is the most important clause in the Bill; at other times, he says that it is just a cosmetic exercise. I do not believe that that is so. It is a significant part of the Bill. He was right in that part of his comments, and I will explain why in a moment.

Andrew Tyrie: First of all, I was not suggesting that the area of policy is a cosmetic exercise; I was suggesting that the Governments proposal to try to reform and improve it is a cosmetic exercise.
We need to proceed on the basis of facts. The Bank of England was not consulted about the proposals before their publicationthe Governor himself appeared before the Select Committee and said in a public session that he had not even seen them, either on the day, or the day before their publication. The hon. Member for South Derbyshire, who is on the Select Committee with me, confirms by nodding his head in agreement.
It is not the case that this side is setting up a straw man and saying that all tripartism is wrong. It is the case, though, that on this side, we have repeatedly said that any system must have clear leadership. I have said that that leadership should come from the Chancellor. It is simply not the case that the tripartite arrangements worked well before 2007it was not chaired by the Chancellor. As far as I am aware, the answer to the question repeatedly asked by my hon. Friend the Member for Fareham was that there were no meetings chaired by the Chancellor before 2007. However, if the Minister can enlighten me as to when such a meeting took place, we will be interested to know.

Ian Pearson: The hon. Gentleman talked about consultation, and I repeat what we said in response to the Treasury Committee and the relevant extract in relation to the White Paper. Our response was:
Its development was discussed with the Bank and the FSA at a number of levels, but it ultimately represents the Governments view.
That is right. As one would expect, we consulted in preparing the White Paper, as it was right to do so.
Let me explain, as I said I would, the differences. The council will be statutorily required to meet every quarter. Meetings will be scheduled in advance with agreed agendas, and consider the analyses by the Bank and the FSA on risks to financial stability. The financial stability report of the Bank and the FSAs financial risk outlook will be considered as part of the quarterly strategic discussion. The draft terms of reference of the council, which have been published, stipulate that reports must be considered in three ways: a summary of the report must be discussed, risks highlighted must be assessed and the council must consider its response, including options for mitigating action.
What we have is a structured approach that will ensure that risks are fully monitored and a suitable response co-ordinated. It will be beneficial in times of stability, as well as in more challenging times, such as those that we have experienced over the past couple of years. The council is also required by the draft terms of reference to consider both the Banks and the FSAs financial stability strategies, as provided under the Banking Act 2009 and this Bill. The council will therefore act as a forum for discussion and co-ordination of each authoritys strategic approach to financial stability.
In addition to the statutorily mandated quarterly meetings, the council may of course meet more regularly, and, as set out in the draft terms of reference, the Government anticipate that the council will meet on a monthly basis for the foreseeable future.

Mark Hoban: The Minister talked about the process that the council would go through in reviewing the financial stability report and the FSAs financial risk outlook. Is he saying that the process is a new one, or did the process take place before the run on Northern Rock?

Ian Pearson: What I am saying is that as a result of introducing new arrangements, with the Council for Financial Stability, we are formalising processes that are already taking place. We are acting in a more transparent and accountable way. We believe we have struck a balance in making the deliberations of the tripartite more transparent. Let me explain. Clearly, a balance needs to be struck between the public benefit from greater transparency and the need to maintain confidentiality. That is a point flagged up by many respondents to the consultation.

Mark Hoban: I would like some clarity. This is either a fundamental or a cosmetic change. The Minister argues that it is a fundamental change. Did the Chancellor, the Governor of the Bank of England and the chairman of the FSA meet regularly to discuss the financial stability report and the financial risk outlook? Yes or no?

Ian Pearson: What I am trying to say to the hon. Gentleman is that there was a standing committee, it met at regular times during the financial crisis over the past couple of years, and it will be replaced by the Council for Financial Stability. The council will formalise meeting arrangements, will be more transparent and will ensure that there is a clear line of accountability to Parliament. We intend that parliamentary scrutiny will be facilitated by the transparency of the council through its quarterly meetings and the Treasurys annual report, which is proposed in the legislation. Clearly, there are opportunities for the Treasury Committee to make its own judgments on how it wants to scrutinise matters. It is not for me as a Government Minister to make comments in that regard, but I think there is a strong case for the Treasury Committee to have a major role in providing appropriate channels of accountability to Parliament.

Mark Todd: Will my hon. Friend set out the tripartite authoritys approach through this new institutional framework to one area that certainly seems to have been absent, which is the war-gaming exercises that would be associated with the practical working of the three authorities in confronting a crisis? I imagine that it is a clear accountability for this particular body to define the scenarios, discuss the outcomes and plan how to proceed and evaluate the result. Is there any evidence that that is part of the brief of this particular body?

Ian Pearson: The Council for Financial Stability, as my hon. Friend will know, has an important role. He will see from the terms of reference that were published on the Treasury website that its role covers a wide range of areas. It is a co-ordinating rather than a decision-making body. His point about war-gaming is a matter that would be discussed in terms of areas of responsibility for ensuring that appropriate arrangements are in place to ensure that there is an effective regulatory regime that takes a risk-based, proportionate approach. I hope that provides at least some reassurance.

Rob Marris: Will my hon. Friend give way?

Ian Pearson: I will give way one last time to my hon. Friend and then I must make some progress and move on to the amendments.

Rob Marris: One of the lessons that I am picking up from the Ministera lesson that has been learnedis that the Governor of the Bank of England, the head of the FSA and the Chancellor of the Exchequer met frequently during the crisis, but by implication did not meet frequently enough before the crisis, and the Council for Financial Stability will redress that in future by ensuring that those meetings are regular and quarterly. Another lesson that I have learned from the crisis is that some banks are too big to fail. That is particularly the case nowthis country simply cannot afford to bail out another bank. In terms of preventive measures, will the Council for Financial Stability look at the break-up of one or more of the big privately owned banks we currently have in the UK? The risk of their failing is unanswerable, because we do not have the money to bail them out.

Ian Pearson: With respect to my hon. Friend, there are other opportunities and indeed places to discuss the issue of moral hazard and the too-big-to-fail argument. In particular, when we get on to discuss living wills, we can have a substantial debate on that issue, because living wills are directly designed to address that issue.
Let me briefly make one or two points. First, I think that the hon. Member for Fareham tried to misconstrue my position when I talked about the roles of the different tripartite bodies and the role of the Bank and its responsibility for monetary policy. As I am sure he is aware from the Reforming financial markets White Paper, the Government have made it clear that there are significant practical problems associated with using short-term interest rates to pursue macro-prudential regulation policy goals. I was not for a moment pretending that that is what I was suggesting that the Bank of England should do.
On the point made about the comments of Andrew Whittaker and the FSA, I want to draw the Committees attention to the FSAs memorandum submitted following the oral evidence. The relevant section that I want to put on the record is:
Our evidence was that it is a joint enterprise
that is, financial stability
between the three authorities, each of whom have different levers available to them. The Council for Financial Stability will enable effective co-ordination in relation to the overall approach on all issues relating to financial stability and will allow each of the authorities to contribute to the financial stability work. There is no general hierarchy among the authorities, each of which has its own specific responsibilities.
Again, that is the key point that I want the Committee to recognise. It is about the Financial Services Authority as the regulator, the Bank of England and the Government coming together and co-ordinating action. There is no hierarchy, and there should be none, when it comes to such matters.
In direct response to the point made by the hon. Member for Chichester about who is in charge, it is a joint enterprise, as I have just said. It is the responsibility of all the appropriate bodies. My hon. Friend the Member for West Bromwich, East praised him for his speech, but the hon. Member for Chichester said that macro-prudential regulation should be the responsibility of the Bank of England and that it should lie with the Chancellor of the Exchequer. That is not a defensible position. I will happily give way while he seeks to explain it.

Andrew Tyrie: I did not say that, as the record will show; I said that responsibility for the management and provision of advice on systemic riskI said tentatively; incidentally, I also said that the Government should not rush it, which is what they are doing now, because they need a political gestureshould probably lie with the Bank of England, and that the Bank of England should then act on it under the overall direction of the Chancellor of the day. I gave my reasons why.
I have been trying to intervene on the Minister for some time, so I will take this opportunity. Does he think that it furthers the cause of credibility on this matter to persist in what is, frankly, a state of denial about the failure of the tripartite system before 2007? He refused to acknowledge that no meetings of substance took place, and he rejected completely the Treasury Committees considered conclusions.
Briefly, I conclude by reading paragraph 276 of the Treasury Committee report again, as it bears so directly on what the Minister said when he said that the system worked well:
We cannot accept, as some witnesses
and now the Minister
have suggested, that the Tripartite system operated well in this crisis...for a run on a bank to have occurred in the United Kingdom is unacceptable, and represents a significant failure of the Tripartite system. If the system worked so well, the Tripartite authorities should take a closer look at the people side of the operation.
Who is in charge?

Ian Pearson: I do not want to return to the Governments response to the Treasury Committee report into Northern Rock. Our position was made clear at the time. I hope that the hon. Gentleman will acknowledge the Governments recognition that there were failings. Lessons have been learned, and that is what we have tried to do through this exercise over the last couple of years, to ensure that improvements are made where they are required. Our analysis is that the tripartite model of regulation is appropriate, and we do not think that alternative models would have produced any difference. That remains the Governments position.
In response to the question about who is in charge, each authority has its responsibilities and tools for financial stability. The key point is that each analysis and approach is effectively aligned and co-ordinated, and that is where the Council for Financial Stability can improve on the system that has been in operation. Its role will be to monitor and co-ordinate to ensure that effective alignment.

Andrew Tyrie: I recognise that the Minister has an impossible job in defending this. He was not the Minister prior to the development of this crisis; he has come late to the show and found himself having to handle an impossible brief by not only defending what happened, but also trying to pretend that we should broadly carry on as we are with the current system. I salute him in his efforts to do that impossible job. However, surely he must grasp that the one crucial issue that virtually everybody who has looked at this matter has concluded as necessary, is the establishment of a clear line of authority through to one man or woman. That clear line of authority is still lacking in the Bill. Even though he will not give way now, will he be prepared to leave the Committee today and consider the issue, so that we can take another look at it on Report?

Ian Pearson: This issue has been considered many times before. The hon. Gentleman holds a certain positionhe is scarred by personal experience in the matter. The Governments view is that the tripartite system is the right approach. It is a misunderstanding to say that there is one person in charge for everything to do with financial stability and consumer protection in the United Kingdom, because each authority has different responsibilities. The key point is to ensure effective alignment and co-ordination.

Andrew Love: Will the Minister give way?

Ian Pearson: I happily give way to my hon. Friend, but then I must make some progress.

Andrew Love: Surely the important point here is that there is not just a Council for Financial Stability, working alone. There has been massive change in the FSA, which failed in its regulation of Northern Rock. There has been a substantial strengthening of the Bank of England, with a special resolution regime. We still have macro-prudential regulatory changes to be made. Putting all that together, it makes sense to go down the route that the Government are going down.

Ian Pearson: I agree with my hon. Friend. The idea of having one person whom we could say was in charge of central banking, monetary policy, prudential regulation, public spending and wider fiscal policy does not make sense. It is certainly not the view of the Government, although it might be the view of the hon. Member for Chichester.

Andrew Tyrie: We have to proceed on the basis of some fact. No one in the Opposition is suggesting that the conduct of business regulation should be put in the charge of one man who is always the same man and is responsible for the management of systemic risk. We are talking about macro-prudential supervision in the context of maintaining financial stability in the overall financial systemsystemic riskand we are not talking about conduct of business regulation. The Minister implied repeatedly that we were eliding the twowe are not. He needs to discuss the issue in the Bill, in clause 1.

Ian Pearson: I agree with the hon. Gentleman in the sense that we are talking about macro-prudential regulation. There are those who want to carve out some of the systemically significant banks and transfer responsibility for their regulation to the Bank of England. I do not think that that would be a particularly helpful approach. In my view, the nature of the changes in the financial system over the past 20 or 30 years has seen increasing integration. Something might look systemic at one point in time, but what might not look systemic may prove to be very systemic indeed when circumstances arise. So, I do not accept that that approach is the right one to take.
The hon. Member for Fareham spoke of the rationality of markets. Apart from recommending Daniel Kahneman, in addition to Thaler and Sunstein, as I have done on previous occasions, I want to agree with the hon. Gentleman, to the extent that he highlights the roles and responsibilities of firms, their boards and their shareholders. It is important in the financial crisis that we recognise that that was at least as big a factor as difficulties with regulatory judgments that have been identified. That should be recognised.
The second point of substance to which I feel I need to respond is about macro-prudential tools. The White Paper is clear on the matter, which we are pursuing internationally, as the hon. Member for Fareham knows. International co-ordination is obviously crucial, to avoid regulatory arbitrage and to ensure consistency of approach. After we have developed the macro-prudential toolkit through ongoing work in the Basel committee, for example, we will take the decisions necessary to place those tools with the appropriate authority. Both the Bank of England and the Financial Services Authority support that position fully. We must determine what tools are needed before deciding to whom to give them. I hope that he will recognise that point.
Amendments 37 and 38 provide a different model for the council from that proposed by the Government. The council would have ultimate authority and the ability to direct the Treasury, the Bank and the FSA. As I have argued, the Governments vision for the council is one of close co-operation, monitoring and co-ordination, ensuring that the bodies are aligned in pursuing their objectives. That model respects the independence of the Bank and the Financial Services Authority.
The amendments, by contrast, would change that model completely, subserviating the power of those institutions and the Treasury to the new council. It is worth pointing out that the amendments do not go far enough in providing the necessary legal architecture for such an institutional framework. For example, how would the council take a decision to direct one of the authorities to use its powers: by majority vote or a decision by the chair? How would the direction be enforced? However, I recognise the probing spirit in which the hon. Member for Fareham moved the amendments.
I do not agree with the model proposed, for a number of good reasons, but at heart is the fundamental difference that we see the council as a body with a monitoring and co-ordinating role to ensure that authorities with distinct responsibilities for financial stability continue to work effectively and closely together. In the Governments view, the council is a forum for the effective co-operation of the three authorities. It is not about a power hierarchy, which is what the amendments would establish. There will be no votes. It is not for the Government to impose their will on an independent Bank or financial services regulator, which is why I hope that the hon. Gentleman will withdraw his amendments.
Amendment 36 requires a Treasury statement on the council to specify the responsibilities of each member to protect or enhance the stability of the UK financial system and the powers available to each authority. There is merit in setting out the authorities roles and responsibilities clearly. A draft of the statement of the councils terms of reference provided for in clause 1(5) is available on the Treasurys website, as I have mentioned. It provides an overview of the authorities financial stability responsibilities and is intended to contextualise the detail of the councils objectives and procedures. The statement also says that the authorities intend to revise the memorandum of understanding first agreed between them in 1997 and updated in 2006, which describes the roles of each authority and how authorities work together to pursue financial stability.
That relates to the point made some considerable time ago by my hon. Friend the Member for Edmonton when he asked for more detail. Inevitably, legislation is provided at a high level and deals with principles. A lot of the detail will be in the new memorandum of understanding; indeed, it already exists in draft form in the terms of reference.
The MOU will complement the terms of reference and be revised in time to lay the terms of reference formally before Parliament, as set out in clause 1(9). Amendment 36 would require it to be placed in the draft statement. We believe that it is preferable to have the high-level context in the councils terms of reference and consolidate the details of each authoritys role in the memorandum of understanding. That is why we have taken the approach that we have, and why I encourage the hon. Gentleman not to press his amendment.
New clause 2 is, perhaps, based on a slight confusion between having a new objective and having new powers. We will not achieve financial stability by directly using a magic wand called the financial stability power, as I believe everyone knowsalthough it would be nice if such a thing existed. Instead, the FSA will enhance stability by using various powers such as authorising banks, making rules, discussing risk controls and so on, in a manner that is aware of, and aims towards, wider financial stability.
For example, as part of prudential regulation, one of the FSAs key tools is to decide how much capital a bank needs to hold. In the past, arguably, the FSA considered this issue primarily for each firm in isolationas we discussed earlier, the so-called micro-prudential approach. We expect the FSA to use that existing power with more awareness of wider financial stability issues, including aggregate levels of exposure and risk in the financial and banking system as a wholethe so-called macro-prudential approach that we have been discussing.
Of course, the Government are not complacent. We always keep under review the powers that the FSA and the Bank need. That is why we are in this Committee Room today, and it is why we were in the Committee Corridor a year ago for the Banking Bill, now the Banking Act 2009. If additional powers are necessary, we will consult and introduce legislation. However, we believe that the measures in the Bill are appropriate, and I invite the Committee to reject the amendments and new clause if they are pushed to a vote.

Mark Hoban: It seems quite a while since we started the debate on these amendments and stand part. The debate has been helpful, in that it has exposed some of the fundamental weaknesses that existed in the tripartite committee prior to the banking crisis. It has become clear, despite my interventions on the Minister, that if it met once, that is at best, and even that was on a virtual basis, and that the three principals did not get together to discuss the financial risk outlook or the financial stability review. It is all very well the Minister saying what a marvellous role the tripartite authorities played in the cure, but they did not work together to try to prevent the emergence of the financial crisis on a scale that would affect the UK economy.
That fundamental failure is one that my hon. Friend the Member for Chichester, when he was serving on the Committee for the Financial Services and Markets Act 2000, highlighted but the Government dismissed. The Government should recognise that the existing arrangements did not serve the country well in the run-up to the financial crisis.
The Minister gives the impression that we are now in a new age of peace and harmony among the tripartite authorities, and that they are all clear about their responsibilities and what they are to do. Let me give the Ministers own view on that. He said that I misconstrued his words in Committee when he said that the
central bank has responsibility for monetary policy
that was the end of the quote I gave. He then went on to state:
What I am trying to explain to the Committee is that financial stability cuts across all those areas of responsibility.[Official Report, Financial Services Public Bill Committee, 8 December 2009; c. 15.]
In evidence-taking, even the Minister seemed to be saying that monetary policy had a role to play in delivering financial stability, so I am not sure who is misconstruing whom. That quote suggests that he did believe that monetary policy has a role, yet it is clear from the views of the MPC that it does not.
The Minister spoke about the supplementary memorandum that the FSA sent out. I was intrigued by this. He quoted paragraph 2, which states:
Our evidence was that it is a joint enterprise between the three authorities, each of whom have different levers available to them.
Paragraph 2 sounds okay and if it had stopped pretty much there the Minister would have had a conclusive point.
However, paragraph 4, in which the FSA talks about its responsibility for setting individual firms capital standards, says in the context of its macro-prudential toolkit that it
would expect to give very considerable deference to other members judgments.
Now, if one does not think that one is subservient, one does not necessarily give deference. From that statement, I very much get the impression of a hierarchy. Paragraph 5 says:
In those contexts, our role in relation to financial stability is a secondary one.
There is a disconnect, or gap, here. On the one hand, the Minister is saying, This is a shared enterprise, we are all responsible for this, no ones in charge, it is all responsibly shared. However, even the hon. Member for Wolverhampton, South-West believes that the Government should be in charge of this process and that there should be clear leadership. Indeed, his views seem to reflect those of the FSA and the Bank.
So, at the outset of the reforms that the Government have proposed, there is a gap between two members of this new Council for Financial Stability and the Treasury. One of the problems that we had, and we saw it during the financial crisis, was evidence of a gap, whereby people in the tripartite arrangements did not feel that they were responsible for particular things, that they thought that those things were somebody elses responsibility and that somebody else was in charge of them. In fact, the Governor of the Bank of England did not know who was in charge.
I do not think that what is before us today addresses that issue in a very clear fashion, because there is a gapthe Chancellor might describe it as a credibility gapbetween, on the one hand, the view of two members of the tripartite authority and, on the other hand, the view espoused by the Treasury. There is a debate to be had about who should be in charge and indeed about whether somebody should be in charge. It is deeply concerning that the three members of the Council for Financial Stability cannot agree among themselves about whether somebody or nobody is in charge. That is a testament to the lack of proper debate and discussion between those three members and I thought that it was instructive that the Governor did not feel part of the consultation process about the White Paper and had not seen it immediately prior to its publication. That does not suggest to me that there is a harmonious relationship in this new age of sweetness and light that the Minister seemed to imply had broken out.
That bodes ill for the work of the Council for Financial Stability. At some point, we will move away from the current crisis and back to a time where, we hope, markets are more stable. How will the council work then? How will it function effectively when even at this pointat the very outsetno one quite knows how it will work? That is a very bad omen.
The hon. Member for South Derbyshire talked about the importance of learning. Not all of this process is about structural change; sometimes people have to learn. There is a strong element of truth in that. The problem about learning is that people forget. I used to know GermanI did German A-levelbut I could barely string together a sentence of German today, 27 years later. People forget. People said after the last housing crisis that there will not be another one and that we had learned from the mistakes that had been made. People forget and lessons are unlearned. So part of the purpose of structural reform is to ensure that some of that learning is enshrined.
I think that we would all recogniseI think that the FSA itself recognisesthat in the run-up to the financial crisis, the FSAs predominant focus was on conduct of business regulation. For a host of reasons, that is where the FSAs focus was, to the detriment of prudential supervision. It now seeks to rebalance thatit has learned that lessonbut what will happen in 10 years time? How will it retain that learning once times and pressures have changed?
We come back to the point made by my hon. Friend the Member for Chichester. In our White Paper, we argued that conduct of business should rest with the Consumer Protection Agency, and that the micro-prudential supervision of banks and systemically important businesses or sectors should rest with the Bank of England. We realise that there could be a conflict of intentionthat one would be subordinate to another. We want to move away from that, to prevent it from happening again. We therefore suggest giving one institution a clear responsibility for the conduct of business and the other a clear responsibility for micro-prudential regulation, so as to enshrine the learning that has resulted from the crisis.

Mark Todd: I agree with the hon. Gentlemans comments on learning, although I would argue that the institutional framework does not necessarily aid the retention of memory; it is strongly to do with the culture of the organisation, its leadership and so on.
That aside, however, there is a lot of learning to be done on all sides. The Governor will probably look back on his early concerns about moral hazard and wonder whether he struck the correct balance in his responses. Incidentally, that is exactly why I raised with the Minister the question of war-gamingthe regular testing of experience, learning and practice among key participants. That has to be done not only by the Chancellor, the Governor and the head of the FSA, who make up the tripartite body, but by the institutions that they lead.

Mark Hoban: The better the relationship between the principals in peacetime, the easier it is in war time. The hon. Gentleman rightly spoke of war-gaming. It was as a consequence of the war games held prior to the Northern Rock crisis that the FSA and the Bank recognised the lack of a special resolution regime.

Mark Todd: And no one did anything about it.

Mark Hoban: As the hon. Gentleman says, no one did anything about it. One hopes that under the arrangements produced by the Government, or those provided by the Opposition, the message about listening to the principals is not forgotten. If a resolution regime had been in place prior to the financial crisis, the outcome might have been very different for some of the parties involved. It is an important issue, and one that should be reflected upon.
Structure, however, has a role to play. The remit and objectives set for an institution in part drive its behaviour. That is why we shall spend some time later today arguing about the setting of the FSAs objectives, as they will drive some of its actions. There are some important issues to do with structure that cannot be allowed to get in the way, particularly if we believe, as I do, that the structure and reforms of 1997 created tension and some gaps, which flowed through into the current crisis. That is why the amendments are important.
I start with the Ministers premise that there is a shared enterprise between the three tripartite authorities. If it is a shared enterprise, people need to know their responsibilities within the framework. If the Bill reaches the statue book, the Bank of England and the FSA will have within their remit the goal of protecting and enhancing financial stability. We therefore come back to the question of what they can do to deliver that objective. What powers will they need to protect and maintain financial stability, and where are the gaps to be found? However, I fear that we see in the Bill the creation of a great building with a clear view from the top floora view of the shared enterprise, underpinned by shared responsibilitiesbut one that is built on weak foundations, as there is no full range of powers available to the Bank and the FSA to deliver their objective. In this context I am thinking particularly of the Bank, because it is the Governor who, on a number of occasions, raised the issue of lacking, in his mind, the powers that he needs to deliver the financial stability objective. The special resolution regime helps the overview of the payment system, but it is not the full suite.
The Minister suggested that there is more work to be done on the macro-prudential toolkit, which had those powers. New clause 2 reminds the Government that that needs to be set outit would be easy for such things to be forgotten along the way. Only when we have that full suite of powers we will know that we have a system with a clear link between objective responsibility and the tools to do the job; we are some way from that.
For those who believe that a tripartite system, or tripartism, as the hon. Member for Wolverhampton, South-West described it, works, the proposal in the Bill takes them part of the way, but it can be clearer. I do not think that the clause goes far enough to clarify the issues, and my amendments, particularly amendment 36 and new clause 2, which I would like to push to a vote when it is appropriate, help to toughen the clause.
For those of us who do not believe that the tripartite system or the regulatory structure has worked in the UK, clause 1the Governments flagship measure, which is meant to introduce some reformsis nowhere near the right answer to the question about what went wrong with the regulatory system and what we can do to resolve it. That is why we raised alternative proposals that would enhance the role of the Bank of England, splitting micro-prudential regulation from the conduct of business regulation, giving the latter to a separate Consumer Protection Agency. We believe that the flaws of the system that the Prime Minister designed in 1997 are so fundamental that the gloss of a Council for Financial Stability is insufficient. That is why I will ask my hon. Friends to vote against the clause. I beg to ask leave to withdraw the amendment.

Amendment, by leave, withdrawn.

Colin Breed: I beg to move amendment 20, in clause 1, page 2, line 1, leave out may and insert must.

Joe Benton: With this it will be convenient to discuss amendment 21, in clause 1, page 2, line 3, leave out may and insert should inter alia.

Colin Breed: I welcome you to the Chair this afternoon, Mr. Benton. Perhaps your colleague, Mr. Gale, has indicated to you that he had permitted the stand-part debate to take place within the context of the amendments. I reserved my contributions to that wider debate to preface my amendments, but now, with your permission, I would like to contribute to the wider debate.
It is not difficult to agree with many Members on the demonstrable inadequacy of the tripartite situation, as it was availableif that is the right termduring the crisis that we saw a couple of years ago and in recent months. It is essential to look at, as the Minister said, the alternatives, including scrapping the current tripartite system and assigning responsibilities more directly to one or another of the existing players, specifically the Bank of England. It is right that a proper review takes place and all the alternatives are considered.
The hon. Member for Chichester, who with remarkable timing has just resumed his seat, could well claim to have been rather prophetic in his protestations of 1999. I was interested in his contribution about his experience in 1987it reminded me of that dark day when I had to return swiftly to my own bank as we saw the sea of red on our screens and millions of pounds disappear, principally from our clients accounts, but also from our own. That day will be for ever etched in the memories of those who went through it because it was such a disaster.
Today, the financial services industry is different from how it was in 1987indeed, it is pretty different from how it was in 1999. Perhaps the biggest criticism that we can level at the tripartite arrangement is that its members completely failed to respond to the changes that were taking place beneath their noses, or to understand their roles and responsibilities and the need to reform and substantially change the way they undertook those duties. As the hon. Member for Fareham pointed out, it appears that they did not have many meetings and did not particularly understand what the tripartite was supposed to be doing. Nevertheless, under their nosesboth individually and collectivelysignificant changes in the way the financial services industry operated were taking place.
In recent years, we have seen the dramatic expansion of financial conglomeratesnot only the banks, but all the other aspects that been added to them through mergers and acquisitions. We have seen a huge rise in greater international cross-border transactions, and the growth of new financial instruments whose implications for individual institutions were often not precisely understood. We have seen the gradual but increasing reduction of capital inadequacy liquidity requirements and greater interconnectivity between financial institutions, so that on floor 4 an instrument was being sold, while on floor 7 of the same building it was being bought back, perhaps even on the same day.

Andrew Love: Does the hon. Gentleman agree that the biggest change was the idea that markets could do it for themselves and that we needed only the very lightest regulation possible? Was it not that more than anything else that undermined the financial system?

Colin Breed: Yes, that is right in the sense that a lighter touch might have been more appropriate in 1999 than in 2009. Although lighter touch regulation might have been required or available to allow the markets to operate in the early period, it later became clear that the way in which they operated had changed so significantly that that lighter touch was inappropriate. That should have been recognised and the proper reforms put in place. We knew from evidence to the Treasury Committee that the FSA was trying to identify what new powers it would require, albeit that it was taking a heck of a long time to do it. Events rather overtook it.
Finally, between 1999 and 2009, the way in which the banks funded themselves completely changed, and it is difficult to see how what might have been considered appropriate in 1999 was in any way appropriate from 2007 onwards. The hon. Member for Wolverhampton, South-West reminded us again of those paragons of virtue in Canada, and its banking system with its rather Scottish Presbyterian influences and traditions. That probably goes for HSBC as well, which had similar traditions and was probably one of the banks least affected by the crisis that engulfed them.
I have been persuaded that no one individual component of the current tripartite group could or perhaps even should be solely responsible for financial stabilityall have a role to play and all come from different perspectives. But how is co-ordination to be achieved? There would have to be co-ordination. The different elements could not work in some sort of creative tension. They would have to understand that it was a co-ordinated effort. Where would all the evidence and information be put, where would the collation be done and where would there be sufficient authority to make appropriate and timely decisions?
A tripartite body of some description seems inevitable to deal with the current complexities and scale of the financial services organisations in the UK. However, as has been graphically pointed out, the current tripartite group, with its inadequate memorandum, informal meetings and ill defined responsibilities, clearly does not fit the bill. It was completely unsuccessful; it is rather difficult to defend any other position. Depositors may have been saved, but taxpayers certainly have not been. Reform was essential some years ago, and it is even more essential today. However, I do not believe that it is for the Council for Financial Stability to undertake micro-management of the regulation of banks or to get into great detail. In my view, it should look over the broader aspects of the whole financial stability framework.
Greater clarity is needed in the relationships between the tripartite body and its membership. We need to understand with greater clarity exactly what it is doing. It needs to have greater formality about it and greater transparency in its operations. Clear responses to the failures already exposed are also needed.
The Council for Financial Stability needs a more distinct persona. It should be not a talking shopalbeit that it meets every month or quarter or whatever it isbut a forum for close monitoring and decisions, even if those decisions are implemented by others. In other words, the Bank of England, the FSA and the Treasury may individually have to undertake some of those decisions, but they have to understand that they need to be made collectively. That is the strength of a tripartite organisation.
In particular, I want the council to be completely separate, if that is possible, from the Treasury, although I agree that it should be chaired by the Chancellor of the Exchequer. It must not become just a Treasury sub-committee, driven by the Treasury, nursed along by it and promoted and publicised by it. I want the council to be recognised as distinct, to have some responsibilities independent from the Treasury and to account to Parliament and the public, not to the Treasury. It is important that the council has a persona more like that of the Monetary Policy Committee.
The amendments in my name and that of my hon. Friend the Member for Twickenham covering the various clauses under the heading Council for Financial Stability are an attempt to provide greater clarity and transparency and to create a separate identity for the council in the Bill to differentiate its role from that of the Treasury. Specifically, amendments 20 and 21 would beef up the current wording. In that sense, they may be probingthey enable me to make these remarks. However, it is important that the Treasurys responsibility to prepare a statement in respect of the councils functions is absolute and that that does happen; I am sure that it will. It is also important that it does not just prescribe what those should be. The council should not be confined or restricted to what is in subsections (6)(a) to (d). I think that the council itself might make a contribution in putting down what it thinks some of its functions should be. Part of the purpose of the amendments is to allow the council the freedom and responsibility to indicate what it believes its functions should be, rather than being told by the Treasury. That would give more of a sense of independence from the Treasury.
The later amendments support the overall contention that the fact that the current tripartite has been found wanting does not mean that a tripartite body cannot be made to function. Indeed, in todays complex world of conglomerates and interconnected financial services, it must be made to work. The changes to the powers of the FSA and the Bank of England, along with the experiences of recent months and years, will, I am sure, provide valuable lessons for the operations of the financial stability council. I see no reason why, with greater definition, better transparency and a real persona, it should not be as successful as an MPC.

Ian Pearson: I acknowledge the hon. Gentlemans stand-part speech. I note that he said that some sort of tripartite system seems inevitable; I welcome his support in that respect at least. He made a number of good points. I was less sure when he spoke of the council as having an independent personality but being chaired by the Chancellor; I am not sure how that would work in practice. However, I recognise the points that he made, and I will not repeat my earlier comments in response to other hon. Members.
Amendment 20 covers the statement that the Treasury may produce under clause 1(5) and would place in primary legislation a requirement on the Treasury to prepare such a statement. It is certainly our intention to produce a statement, but we want it to be a document that can evolve over time as necessary. That is why subsection (7) requires the Treasury to keep the statement under review and subsection (9) requires it to lay the initial or revised statement before Parliament. A draft version of the statement is available on the Treasury website, as the hon. Gentleman knows, partly to facilitate the Committees scrutiny of the Bill. That publication makes it clear that we intend to lay a statement after the Bill is enacted, so I do not think that there is any reason to make the amendment that he proposes. However, I am happy to consider that point further.

Rob Marris: May I turn it around the other way? Given that the Minister just said that a statement will be prepared and revised if necessary in due course, is there any reason to oppose amendment 20?

Ian Pearson: Governments always prefer flexibility, but on the point of substance, we want to produce a statement. It is highly likely that Governments will always want to produce a statement. I do not have any difficulty with the substance of the amendment, but given that we have made clear our intention to publish the statement and I have repeated it today, I do not propose that the Committee should support the amendment and I hope that the hon. Gentleman will withdraw it.
Amendment 21 concerns subsection (6), which indicates what matters the statement may cover. The amendment would strengthen the requirement to indicate that those matters should, inter alia, cover the specified areas. Again, it is not a matter of great division between us. The intention of the subsection is to specify what matters the statement can cover while maintaining flexibility. The wording may is used to provide sensible flexibility in future. We are trying, as Government always try, to ensure that the legislation is as far as possible future-proofed.
All the measures mentioned in paragraphs (a) to (c) of subsection (6) are covered in the draft terms of reference that we published, but it is conceivable that they may not always be necessary, which is why changing the wording as the hon. Member for South-East Cornwall proposes would not make any substantial difference at the moment to the operation of the clause in practice. I do not believe that the amendment is necessary, and we would like to reserve the right to future-proof the Bill as far as possible; that is why the wording is as it is.

Colin Breed: As I indicated to the Minister, the amendment was of a probing nature, to enable me to preface the idea that we broadly support the continuance of the tripartite arrangement, albeit with a considerable amount of stiffening and the creating of a new persona.
The Minister seemed to indicate that it was impossible for someone to chair something that they were not necessarily directly in, but that happens in huge numbers of organisations. User forums are an example; user groups may join together, often as consumer groups, and if someone is a chair of a particular user group there is no reason why he cannot operate effectively as the chair of the whole group while still being the representative of one particular member body. That can work quite successfully. It would mean that there was a differencethere should be a clear and definable differencebetween the council and any Treasury operation.
The Minister is much more for having a sub-committee of the Treasury drive the whole thing, whether that is right or wrong. I believe that there should be greater independence. We have formulated amendments 20 and 21, and some subsequent ones, to try to create that independence. However, I am happy to beg to ask leave to withdraw the amendment.

Amendment, by leave, withdrawn.

Amendment proposed: 36, in clause 1, page 2, line 8, after Council, insert
( ) specify the responsibilities of each member of the Council in protecting or enhancing the stability of the UK financial system;
( ) specify the powers each member of the Council is able to exercise in protecting or enhancing the stability of the system;.(Mr. Hoban.)

Question put, That the amendment be made.

The Committee divided: Ayes 5, Noes 7.

Question accordingly negatived.

Colin Breed: I beg to move amendment 22, in clause 1, page 2, line 9, leave out Treasury and insert Council.

Joe Benton: With this it will be convenient to discuss amendment 23, in clause 1, page 2, line 10, leave out by the Council.

Colin Breed: The amendment would enhance the position of the council, as opposed to that of the Treasury. Clause 1(6)(d) says:
include any...provision that the Treasury consider would facilitate the effective exercise by the Council of its functions.
It is for the council to consider what would facilitate the effective exercise of its functions. The interests of the FSA and the Bank of England are not necessarily what the Treasury thinks they ought to be. The amendments would therefore replace Treasury with Council and remove the words by the Council.

Andrew Love: I thank the hon. Gentleman for giving way, particularly as he seems to be drawing to a conclusion. I am somewhat ill at ease with the suggestion in his contribution, and his previous contributions, that there is something malign about the Treasurys involvement in such matters. The Treasury and the Chancellor of the Exchequer keep Parliament informed of what is happening with issues that are critical to our economy. Why does the hon. Gentleman take such a negative line?

Colin Breed: I am not being negative about the Treasury; it probably has the most important part to play. However, if the new statutory body is to have clear responsibilities, it must be given the opportunity to create its own view of its functions. If not, it will be little more than an arms length part of the Treasury. Perhaps this is where I see some malign intent: it would be extremely convenient if, in time, the council was directed, controlled and influenced by the Treasury. When a fundamental disaster befell us, however, it would be not the Treasurys fault, but the fault of the council.
If the council is to operate satisfactorilyI see no reason why it should notit should be able to enhance its role with its own individual rights, rather than being a sub-committee of the Treasury. It would then be able to consider its functions properly, perhaps ensuring that we do not suffer the same problems again. It could reform itself in response to changes in the financial services industry and in the financial architecture and landscape, here and elsewhere in the world. It is right that the council should seek those functions, although the Treasury will of course have a major say, bearing in mind that it will chair the council.
As the hon. Gentleman suggested, I was about to draw my remarks to a close. The amendments may be controversial, but they are not difficult to understand.

Ian Pearson: The hon. Member for South-East Cornwall is admirably logical in following through his line of thought that the Council for Financial Stability should have more independence and personality. However, for the reasons that I outlined earlier, the Government believe that it is right that the Treasury should play the role described in the legislation.
The hon. Gentleman referred to clause 1(6)(d). That provision is intended to provide flexibility, so that if it becomes apparent that the operation of the council needs to be clarified, that can be done. It is necessary to enable the council to develop its role and adapt to unanticipated circumstances. I do not see anything between us on its capacity to do that.
The hon. Gentleman will be aware that under clause 1(8) the Treasury will have to consult the Bank and the FSA when preparing statements to be issued under the legislation. Such consultation will provide ample opportunity for the Bank and the FSA to influence the contents of statements. That brings me back to a point that I have made on previous occasions: we are talking about a joint enterprise. The need for change will be discussed and agreed by the tripartite authorities. It is certainly not our intention for the council to become an arms length part of the Treasury.
I have been at pains to point out that each member of the council has its own areas of competence, responsibility and independence. The role of the council is to monitor and co-ordinate action, but someone must have responsibility, and we make clear in the Bill that it is the Treasury.

Rob Marris: In resisting the amendments, is the Minister signalling the Governments return to the welcome embrace of democratic accountability, as the Treasury will take the lead if the amendments are resisted? Correspondingly, is there recognition by the Government that we have far too many arms length bodies, quangos and the like? Can I welcome a change of emphasis by the Government?

Ian Pearson: I think that my hon. Friend is making too much of what is proposed. It is important that the Treasury retains the role in question, rather than the council having it. The statement is reported to Parliament, so it is natural that it should come from the Treasury. With the explanations that I have given and an understanding that we are adopting different logical positions, I hope that the hon. Member for South-East Cornwall will withdraw his amendments.

Colin Breed: I thank the Minister for those responses. It might have been clearer if I had indicated in my amendments that we could have deleted subsection (8), but I do not think that that would have been necessarily proper. It is a matter of trying to get the relationships rights. I do not want to repeat myself, but if the council is being set up as a statutory body, it needs to have proper functions and not be some sort of arms length quango. It has to create for itself acceptance in the markets, both domestically and internationally. Its credibility would be significantly enhanced if it had a degree of independence. However, I beg to ask leave to withdraw the amendment.

Amendment, by leave, withdrawn.

Question put, That the clause stand part of the Bill.

The Committee divided: Ayes 10, Noes 3.

Question accordingly agreed to.

Clause 1 ordered to stand part of the Bill.

Clause 2

Proceedings of the Council

Colin Breed: I beg to move amendment 24, in clause 2, page 2, line 22, leave out quarterly.

Joe Benton: With this it will be convenient to discuss the following: amendment 25, in clause 2, page 2, line 24, leave out quarterly.
Amendment 26, in clause 2, page 2, line 25, leave out quarterly.

Colin Breed: These are modest amendments, deleting the word quarterly so that the council must in normal circumstances look at its meetings sequentially. It seems clear that there will be monthly meetings, and there might be intermediate meetings between quarterly meetings. That was alluded to in the debate on whether clause 1 should stand part of the Bill, when it was suggested that the quarterly meeting will be nothing more than a rubber-stamping exercise with very little in it of any material benefit to anyone. The minutes of those meetings will be published, whereas the minutes of the meetings held in the interim, which might contain more helpful information, will not be published. It would be more appropriate for minutes to be taken, so that we have a proper formality in all meetings, and for minutes of those meetings to be published and considered every time.
Limiting everything to the report of the councils quarterly meetings, and publishing the minutes of each of those quarterly meetings, seems insufficient if we are to have an understanding of what the council is doing, what it is considering and discussing and what issues it has on its agenda. This small amendment would take out the word quarterly, so that we had details of all council meetings, rather than only the quarterly ones.

Ian Pearson: As I have indicated, under the Governments proposals, the council will be statutorily required to meet every quarter, although we anticipate that it will meet more often than that in the current circumstances. The importance of quarterly meetings is that they are scheduled in advance with agreed agendas, and they will assess the analysis made by the Bank and the FSA regarding risks to financial stability. Quarterly strategic discussions, including those on the Banks financial stability report, the FSAs financial risk outlook and the annual report on the council, will be publically minuted. As set out in the terms of reference, those minutes will be released within one month of the meeting. It is important that that structure and transparency is provided for under the proposals.
The Government do not believe that the hon. Gentlemans amendments would be helpful, because we do not think that it would necessarily be right to minute publicly all meetings. In future, when the council is required to meet more regularly than every quarter, it is probable that discussions will be dominated by operational matters that are likely to need to remain confidential. We can all envisage circumstances where matters may need to be confidential, and minuting meetings that are dominated by confidential discussion would not be helpful. For example, publishing minutes that reveal nothing of substance could lead to damaging speculation about the stability of specific firms or markets. Such speculation might naturally be centred on firms or markets that are not in fact the subject of specific concerns of the members of the council.
The Government believe that transparency about the quarterly strategic discussions is more beneficial, hence the distinction between quarterly meetings and, when necessary, other meetings. I stress that what we are proposing is a significant stride forward in transparency when compared with previous arrangements. I hope that the reasons I have outlined will lead the hon. Member for South-East Cornwall to withdraw his amendment.

Mark Hoban: I am slightly surprised by the Ministers answer. I intended to raise the point about confidentiality during the clause stand part debate, as it applies to both clause 2 and clause 3 in a broader context. Late last year, loans were made to HBOS and the Royal Bank of Scotland to provide them with adequate liquidity and ensure that they were solvent. It took some timeeven longer than anticipatedfor details of those loans to become public. I am slightly concerned that the lack of transparency to which the Minister refers in the context of the intermittent meetings of the council might create an atmosphere of secrecy that people feel uncomfortable with. We touched on that matter in the Banking Act 2009. A balance must be struck between transparency, commercial confidentiality and unsettling the markets. If minutes are not published, I am not clear how we will knowor if we will knowwhether meetings take place outside the normal quarterly cycle.

Ian Pearson: There is indeed a balance to be struck between transparency and confidentiality. With quarterly meetings, we are proposing a significant improvement in transparency, compared with current arrangements. However, when striking that balance, it is important to recognise that there will or may be occasions in the future when confidential discussions need to take place about a particular institution or market, or about another range of circumstances that it is in everyones interests should remain confidential.
My basic point is about something that is pretty much the sole item of discussion on an agenda. If a minute must be published saying that something was discussed but it was completely confidential and we cannot say anything about it, is publication really in anyones interests? I do not think so, which is why, when we thought carefully about the judgment to be made, we decided on quarterly strategic discussionslooking at financial stability as a whole, and at reports from the Bank and the FSA. If there are meetings in between such periods, particularly if they concern confidential items, they should not be completely minuted. If the Committee thinks about it, that is the right balance.

Mark Hoban: May I make a suggestion to the Minister? At one of those interim meetings, a discussion takes place between the tripartite authorities and the outcome is an action that the FSA will take to increase the capital requirements of all banks in order to restrict in effect the level of lending. That is clearly commercially confidential, but also a response to a risk identified in the financial stability report or in the financial risk outlook. Could such action be taken at one of the interim meetings and therefore not made public?

Ian Pearson: I do not want to speculate and respond immediately about individual circumstances. It would depend on the circumstances of each case as to what should remain confidential and for how long. As the hon. Gentleman is aware, under the Financial Services and Markets Act 2000, the requirement is for a lot of information to be made publicly available at appropriate times. Certainly the Council for Financial Stability has the capacity to decide to minute something publicly, so it could. However, if the council decided it would best remain confidential, we ought to recognise the judgment of those who would be making that decision. What we are proposing in the system that we have before us maintains the flexibility to allow that judgment to be exercised.

Mark Hoban: I have listened to the point made by the Minister, and I have great sympathy with it, but if the action led to the expenditure of taxpayers money or the issue of a guarantee or indemnity by the taxpayer, would that be picked up by the reports made to Parliament as part of the Banking Act 2009? Is there a backstop that ensures that information appropriate to taxpayers is made know at the appropriate point?

Ian Pearson: I think that the short answer to the hon. Gentlemans question is yes. Systems of parliamentary accountability are in place now for the expenditure of Government funds or the taking on board of contingent liabilities, as he is well aware. None of that will change. All we are saying here is that we want to see quarterly minutes and that we think that there is a reasonable case, when meetings take place between the quarterly ones and confidential items are discussed, that if the decision of the Council for Financial Stability is that they should not be minuted, that ought to be respected.

Colin Breed: During the evidence session, the Minister must have listened to the evidence from my questions about the potential for the meetings. Given the scenario that now exists with the media and everything else, the knowledge of an unscheduled meeting of the council, perhaps over a weekend, is unlikely to persist much longer than a few hours before it appears on Mr. Robert Pestons blog. The fact that the Government still feel that they can maintain an area of such confidentiality in todays world is extremely naive. There are safeguards in the Bill to determine what is confidential and what can be there. I entirely agree. The fact that nothing is said may well precipitate the crisis that we are trying to avoid. The Minister may find himselfor future Ministers may find themselvesbeing grilled on Newsnight, where he may find it difficult to defend. Of course it will be published. A month or 40 days later, everything would have moved on in many respects anyway.
It is difficult to criticise something that we have not seen, and we have not seen what the quarterly minutes might produce. They might be relatively full, and might consider at least the essence of what the interim meetings have discussed. Arguments were proposed when the question of whether to publish Monetary Policy Committee minutes was being discussed. The publication of the MPCs minutes several weeks later has been a real strength to its credibility, to peoples understanding of how it works and to the markets acceptance of its work. What we are discussing is equally important. It is important that we err on the side of transparency and publication, not on the side of secrecy and trying to deny material. Yes, I accept that there needs to be some confidentiality and sensitivity, but we must not have completely sterile quarterly minutes that mean nothing to anyone, and which do not in any way give an indication of the work of the Council for Financial Stability.
The council may not be talking about individual banks, but about the sorts of strategies that it jolly well should have been talking about in the years leading up to Northern Rock. Had the issue been given much wider publication and airing in the general financial fields, we might well have got the bank to pursue what it should have been doing in reforming itself somewhat more quickly than it did. There is a benefit in recognising that publication of as much as possible about its work and its thinking will add to its credibility, and provide us with a much better system of regulation.

Mark Hoban: The hon. Gentleman is making an interesting point, but is there not a distinction between the work of the MPC and that of the council? The minutes of the MPC explain a decision, the outcome of which is in the public domaineveryone knows whether interest rates are left unchanged, increased or decreased, or whether there is more quantitative easing. The difference here is when a decision is taken by the Council for Financial Stability, the outcome may not be in the public domain. It may have decided that an institution should hold more capital or should cease to have a particular type of business, or that a group of institutions must change the way they work. Such decisions might not be in the public domain. We can argue about whether they should be, but there is a difference in the type of decisions that are being made by the two bodies. That should be reflected in how much confidentiality there is on the publication of the councils minutes.

Colin Breed: I broadly agree with that. I think I said earlier that it is not the councils role is to micromanage the regulation of banks. The FSAs role is to indicate to individual organisations whether they have sufficient capital. I think the council has a much broader remit, much of which ought to be considering the markets and the overall framework of stability. It may well have evidence, information or contributions from the FSA in respect of individual organisations. I do not think that that is an appropriate thing to put down in the minutes. That a number of institutions are finding life a bit more difficult, whatever the circumstances, is the sort of information that needs to be fed into the councils considerations. That is not to do with the sensitivity of individual organisations and I do not think the council will get too involved in that.
As I said, perhaps the analogy of the MPC is not exact. For there to be credibility, an understanding of the councils functions and for the wider financial community to see that the council is doing what it thinks it ought to be doing, there should be publication and transparency as far as possible, rather than just the minimum that is required.
I have said what I want to say to the Minister. I am sure he understands that we are not far removed on the page. When we see the first set of minutes, we will begin to see whether they are meaningful. On that basis, I beg to ask leave to withdraw the amendment.

Amendment, by leave, withdrawn.

Mark Hoban: I beg to move amendment 35, in clause 2, page 2, line 22, at end insert
and publish its response to those risks in its minutes..
The clause concerns the way in which the council proceeds and the publication of minutes. As the hon. Member for South-East Cornwall said, the proof of the pudding will be in the first set of minutes that we see. We will then know how thorough are the discussions between the various principals and what contribution the committees deliberations will make to financial stability. We welcome the fact that it will meet at least quarterly and the Ministers comment that it will meet at least monthly during the financial crisis. As we established, that is an improvement on the situation in the run-up to the financial crisis.
The amendment asks for more clarity on what will be published in the minutes. We know that the council will review the financial risk outlook and the financial stability review. That will be a key part of its work. The Bank and the FSA do excellent work in looking at the market, understanding what risks there are and elaborating on their impact. Those who have read the reports will be impressed by their thoroughness.
The role of analysing the macro-prudential risks is being looked at in more detail by institutions across the world and is part of the remit of the European systemic risk board, which is part of the architecture put in place as a consequence of the de LarosiĂ¨re review. That body will look at some of the emerging macro-prudential issues at a European level. Such work is already happening. The Bank of England has been monitoring financial stability in quarterly reports.
When he was deputy governor for financial stability, Sir John Gieve in an interview with the BBC in December 2008 said:
We did spot some crazy borrowing going on, asset prices looking unsustainable and we said actually for a couple of years before the crash that a correction was coming.
One school of thought says that the financial crisis came as a bit of a surprise to all of us; another says that some of the problems had been identified, but that no one acted on that. The Bank for International Settlements identified in its reports some of the seeds of the financial crisis. Part of the problem is that bodies that had the task of analysing the trends published reports that generated the odd press article, but nothing seemed to happen as a consequence. Who did anything about the warnings that the Bank of England issued or that were identified by the Bank for International Settlements? I suspect that very few people did anything about them at all and that is the problem. It was very easy to ignore them, because some of the conclusions that they were reaching were quite difficult. To use a phrase of a US Federal Reserve bank governor in the 1930s, it required people to take away the punch bowl at the party. It required someone to tell Chuck Prince to stop dancing. It required someone to say, You have to stop a particular activity, you will have to cease doing it, so we will have to do it in a different way. It is very easy to ask people to identify the risks, but it is much harder for someone then to decide how to act on the findings of those reports.
The Governor of the Bank of England told the Treasury Committee in June 2009:
We were given a statutory responsibility for financial stability in the Banking Act, and the question I put to you in February at this committee, to which I have not really received any adequate answer from anywhere, was: what exactly is it that people expect the Bank of England to do? All we can do at present
this is the key section of his comments to the Committee
before a bank is deemed by the FSA to have failed, is to write our financial stability report and give speeches.
Under the new regime, therefore, the Governor produces his financial stability report, the chairman of the FSA produces the FSAs financial risk outlook, but what happens next? That is the challenge.
I am sure that we have all had the experience of either sitting in church listening to sermons or listening to experts in the new year telling us how to change our lives and we think, This is a jolly good idea about how to change our lives, but I will leave it until tomorrow, or, I will put that diet off until next month. Of course, no one then goes back and asks those experts, Well, you issued these warnings about peoples health, alcohol consumption and smoking, but what happened about those warnings? We need to ensure that the Council for Financial Stability does not end up in a situation where it talks about these reports but then nothing happens in terms of responding to the risk that has been identified.
One way to ensure that there is an audit trail about the activities of the council is to make sure that, in the minutes of its meetings, there is not only evidence that the risks have been identified and discussed but that there is some record of the decisions that have been taken by the members of the council on how they will exercise their respective responsibilities in response to those risks.
That goes back to the debate that we had on the previous clause about the FSAs supplementary addendum. As the body responsible for setting capital standards, it may be that the FSAs remit, as a consequence of one of these meetings of the Council for Financial Stability, is to increase capital across the board, because the risk analysis that the Bank of England has made suggests that there is a credit bubble rising and that holding more capital is the right way to choke off some of that additional lending. That might be the outcome of a council meeting and we can then see very clearly the risk identified in the financial stability report and the response to it in the Council for Financial Stability.
When I was an auditor, we would start every audit with a list of risks and our responses, so that there was a very clear starting point; we knew what we had identified and what we would do as a consequence. That provided a discipline and a framework for the work that we were about to do. The minutes of the council should be sufficiently transparent to ensure that readers of those minutes know exactly how the authorities have dealt with the risks that have been identified.
It may be the case that, after deliberation, people say, Actually, the risk is not material, the probability of it occurring is so slim that no action should be taken, but this is how we have disposed of that risk and that is how we have decided how that risk should be dealt with. If the amendment is adopted, at least we will be able to see in the minutes how the council reached a conclusion about what it was going to do and each members justification of how it would respond to the risk and exercise its responsibilities.
That is an important way of establishing transparency and accountability and ensuring that the risks identified in all the different processes have been properly addressed and acted on. It will avoid a recurrence of the situation in which people identify risks like those in the December 2004 financial stability report, which said:
The questions are whether risk is being priced properly, and to what extent the search for yield is leading to excessive leverage.
That is a clear sign of what was going to happen, but no one appeared to do anything about it. If there is greater transparency through the minutes, it will demonstrate that risks have been identified and discussed and that action has been taken, or an agreement reached on why action should not be taken. We will know what has happened to the risks. That was not the case under the previous regime, and this is an opportunity to put that right.

John Howell: I want to pick up two points arising from the speech that my hon. Friend has just made and continue the theme of what can be published in the minutes. The need for an audit trail is even more important when we consider the draft terms of reference.
Annexe B discusses the Council for Financial Stabilitys deputiescivil servants who will meet monthly. It is not unreasonable to expect that they will do most of the donkey work. Indeed, B1 of annexe B states that the deputies
will meet to prepare and advance the work of the Council.
My view is that their role will be to lay the grounds and, hopefully, to assess a lot of the material that comes before them in order to prepare what will be discussed at the main meeting of the principals of the Council for Financial Stability. Yet we see from the draft terms of reference that the minutes of that group will not be published. I understand the sensitivity about naming civil servants, but surely there must be an audit trail. My hon. Friends amendment addresses the weakness arising from the terms of reference.
My second point relates to the things that can be excluded from the minutes. I am less worried than others about the exclusion of things that are genuinely commercially confidential, but there is also the potential to remove anything that might pose a threat to the stability of the UK financial system. That is such a wide definition that some witnesses asked what exactly would be left. There is a distinct risk that the provision could be used politically. Is it wide enough to exclude, for example, remarks that are critical of the Chancellor or of specific Government policy: in other words, politically embarrassing?
Given that the council is required to meet quarterly but the principals are not required to attendthey can send deputiesthere could be a run of meetings to which the Chancellor or the Governor of the Bank of England do not turn up. The attendance list, therefore, could itself be a cause of risk. If the Chancellor, the Governor of the Bank of England and the chairman of the FSA all suddenly decide to turn up together and that is the only thing printed in the minutes, everyone will know that something untoward happened. We need to explore further with the Minister how the provision for redaction of the minutes will be used.

Ian Pearson: This debate essentially follows some of the points made by the hon. Member for South-East Cornwall. We as a Government have made it clear on the face of the Bill that important strategic discussions will be held at a minuted quarterly meeting. It is right that hon. Members press us about whether the minutes will be illuminating. The minutes must follow the structure set out in the terms of reference, which the hon. Member for Henley referred to, and which I have referred to on a number of occasions already today. We have a structured agenda that provides the basis for discussions that will then be minuted. I do not believe that the minutes will be sterilethe hon. Member for South-East Cornwall raised that risknor do I believe that the amendment is necessary, because the same effect will be achieved by the requirements of the draft terms of reference. We intend that the minutes will provide significant clarity on the views of each authority individually, and the council collectively, on the challenges to financial stability and on the co-ordinated action being taken. Putting that on record will perhaps provide some reassurance to hon. Members, and to others who follow these discussions.
The provision proposed by the amendment is therefore not needed, nor does the requirement need to be in the Bill. As I have indicated, it is better that it appears in the terms of reference, as that is a more suitable vehicle. We are introducing greater transparency through the proposals. It is not appropriate, as the hon. Member for Henley suggested, that the proceedings of working group meetings be disclosed, but significant transparency is clearly outlined in the Bill and in the terms of reference. I hope that with those additional clarifications, the hon. Member for Fareham will seek leave to withdraw his amendment.

Mark Hoban: There is a difficult balance to strike between what should be in the Bill and what should be in a non-statutory document, which is what the terms of reference are. The draft terms of reference will not be a statutory instrument to be debated on the Floor of the House, and may well change between now and Royal Assent. Although I take some comfort from the Ministers saying that the sort of information that I expect to see in the minutes will be there, and that the terms of reference will get us to that point, that perhaps does not go as far as having a measure in the Bill.
The comment that my hon. Friend the Member for Henley made, and which the Minister did not pick up on, was about the publication of the register of who is at the meeting. My hon. Friend made a slightly whimsical point about whether all the principals turning up would mean that there was a crisis. I hope that the fact that all the principals turned up would not be notable because it happened regularly. However, peoples attention might lie with the body now, but over time they might take less interest and send their deputies. My hon. Friend made an important point about transparency as a way of monitoring the engagement of the principals, and that might be reflected in the terms of reference at some point.
I take some reassurance from the Ministers saying that the requirement in the amendment will be in the terms of reference, and I hope that that is followed through because it will be proof of how seriously the system is taken. One of the failures of the regime in the run-up to the financial crisis was that risks were flagged but no action was taken, and if we are trying to increase financial stability in the UK we want to avoid a recurrence of that. I beg to ask leave to withdraw the amendment.

Amendment, by leave, withdrawn.

Colin Breed: I beg to move amendment 28, in clause 2, page 2, line 36, leave out someone else and insert an approved nominee.
On the basis that I withdrew a previous amendment in respect of meetings as opposed to quarterly meetings and there is already a reference to the minutes of quarterly meetings being published, I was happy not to move amendment 27.
The Bills wording is most extraordinary. Clause 2 states:
If a member of the Council is unable to take part in any of its proceedings, the member may appoint someone else.
Someone else could be almost anyone. Indeed, my admirable researcher, Andrew Baldwin, asked me whether he could apply for the job. The phrase someone else is also a bit demeaning. Some of us may be used to serving on a local council, where we sometimes have designated deputies, but a designated deputy is normally someone who is acceptable to the committee or the council.
My amendment highlights the strange situation whereby someone else may be appointed. Perhaps it should be someone who is an approved nominee. Approval means not just approval by the person who is designating a person to represent them; that person should be acceptable to the other members of the council. I think that both the FSA and the Bank of England would want to know who the approved deputy is from the Treasuryfor the Chancellorwho might well be chairing the meeting. It is not an unreasonable request to say that we should not use the wording someone else but should refer to an approved nominee or an approved person to undertake that deputising requirement.

Rob Marris: I have some sympathy with the amendment and I seek an assurance from my hon. Friend the Minister that the someone else will not be one of the other two, because under the provision the Chancellor could nominate the Governor of the Bank of England and so could the head of the FSA, and there would be a meeting of one person saying, Im the someone else times two. It may seem ridiculous, but may I have an assurance from the Minister that that is in no way the intention and that that signal will be sent out if the amendment is not accepted?

Ian Pearson: That certainly is not the intention. The principals themselves are best placed to decide who represents them. I do not think that we will find ourselves in a situation like Caligula where he appoints his horse. We can rely on the Chancellor, the Governor and the FSA to appoint suitable people. Using the phrase someone else at least gives the Chancellor the flexibility to appoint another Minister, a permanent secretary or a most responsible official. We could make too much of this. What we are trying to achieve with the Council for Financial Stability is quite straightforward. It will be senior-level representation. The Chancellors photocopying assistant is not likely to be appointed as his deputy. We can leave the matter to the good judgment of those involved.

Colin Breed: Of course we can leave the matter to the good judgment of those involved, but there is a more serious point. There could be some qualification. If, as far as the Treasury is concerned, it has to be a ministerial-level appointment, that is fine, but of course we are also talking about the FSA and the Bank of England. They, too, may have certain levels of appointed official who would be nominated to be a deputy or a representative. I am happy if that is the case. I would not be happy if the someone else was someone different every time. There would be no continuity, in that we could have three people sitting around the table who have not even met each other very much, and there could be three completely different people the next time, and the following time.
I know that that is ridiculousit is almost as ridiculous as the suggestion by the hon. Member for Wolverhampton, South-Westbut it exposes the inadequacy of the term someone else. Will the Minister, perhaps before Report, at least consider a slightly better wording that would indicate that whoever operates on that deputy or representation basis had at least some standing and was acceptable to the other members of the council?

Ian Pearson: I am not sure whether the hon. Gentleman was intervening on me. It is unlikely that I might want to do that, but I understand his point. If he had suggested someone else appropriate, that might have addressed the issue that he raises. I seem to remember that somewhere in the Banking Act 2009 we referred to appropriate people, but I believe that those who follow these things will understand that there is no intention other than to have senior level and appropriate representation, if not the direct principals themselves, who may not be able to participate because of illness or for other reasons. We have the clause in the Bill to take account of that.

Colin Breed: I am happy with the Ministers assurances. If he could come up with a slightly different wording before we finalise the Bill, I would be absolutely delighted. On that basis, I beg to ask leave to withdraw the amendment.

Amendment, by leave, withdrawn.

Mark Hoban: I beg to move amendment 39, in clause 2, page 2, line 39, at end add
(9) Where the Council is unable to reach agreement on the exercise of its functions, the Chancellor of the Exchequer can take reasonable steps in pursuit of its function..
The Bill appoints the Chancellor of the Exchequer as chairman of the council. The question is, what role does the chairman play in the committee? Is he or she there simply to control proceedings and ensure that people run through the agenda, or is there more to it than that? In a way, this goes back to the point that the hon. Member for Wolverhampton, South-West made in a debate on the previous clause. He assumed that the structure of clause 1 was such that the powers in subsections (5), (6) and (7) meant that it was clear that the Chancellor was in charge.
When the hon. Gentleman made his point, the Minister winced, because he has been keen throughout to avoid creating the impression that the Chancellor is in charge. However, I can foresee a situation where there is deadlock in the committee: an issue may be raised in a report from the FSA or the Bank and there is no agreement among the principals about what the action should be. It may be as a consequence of a difference of opinion about the nature of the risk, or about the probability of the risk materialising and having an impact on financial stability. It may be that people cannot agree on the appropriate action to be taken. A risk is identified, everyone agrees that it is important to tackle it, but no one can say what the action will be.
The Minister has been clear that under the terms of reference there will be a process of risk identification, and then the action to be taken will be reported in the minutes. What will happen if the committee cannot agree on the right action? Is the lack of agreementthat impassea reason for doing nothing and just saying, Lets see what happens? Or should someone actually have responsibility for ensuring that action is taken?
The Ministers argument is that this is a shared enterprise, that no one is in charge. The Chancellor happens to be chairman because he is the chairman of the group, and the Treasury has set out its functions, but we are not to think that this in any way means that he has authority over the others. Yet the reality is that, at times, the Chancellor has to be in charge. There are certain circumstances in law when the Chancellor is not in charge, and we discussed them in the context of the Banking Act. For example, responsibility for triggering the special resolution regime rests with the FSA, and the choice of the resolution regime in certain circumstances rests with the Bank. It is only when taxpayers money is at risk that the Treasury has a role to play. In practice, there is a sense of the Chancellor being in charge at the crunch. We go back to the evidence session when we asked John Footman who was the first among equals in the relationship. He said:
The obvious answer is that only one person in that committee is directly accountable to Parliament, and that is the Chancellor.[Official Report, Financial Services Public Bill Committee, 8 December 2009; c. 29, Q62.]
We asked Andrew Whittaker the same type of question. We know that in certain aspects, they seem to set up a secondary role, but he said that the Chancellor sits at the head of the triangle because of
the impact on the real economy and the fiscal impact of any rescue package.[Official Report, Financial Services Public Bill Committee, 8 December 2009; c. 29, Q63.]
There seems to be an expectation among the members of the Council for Financial Stability that the Chancellor is not just the chairman in a formal sense, but he also has a degree of additional responsibility because he is accountable to Parliament for the fiscal impact. As we probed this matter at length during the Committee, it was clear from the point of view of the Bank that if there was a hierarchy, the person at the top was the Chancellor. The Government must be clearer about their expectations of the role of the Chancellor as chairman. They must accept that the other participants are right and that de facto the Chancellor is head of the Committee or they must say that in no sense does the Chancellor have the final say. That would create clarity, but I am not sure whether it would create the right outcome. We saw this in various parts of the crisis. Obviously, the rescue of Northern Rock is the most transparent aspect of the crisis. When we look at the decisions taken on Lloyds, RBS or Dunfermline, we may find that in practice there was a very clear hierarchy about who banged heads together to say, This is the right solution for Dunfermline. or, This is the right outcome for RBS. Clearly, if there is an impasseif people on the Council for Financial Stability are not prepared to take action within their remithow is that broken? Do Treasury officials simply call out for more curry to fuel them through the long nights and then beat everyone into submission, or is there a process in which the Chancellor takes charge, because that is what people expect?
Let me reflect for a moment on my business experience. Sometimes, very complex corporate structures created, in accounting terms, a deadlock company in which no one had control, but there would be a set of decisions in which it was very clear that one party or another had control and could make the big decisions. It may be a veto that they had over a capital investment of a certain size. It may be control that they had over the sale of the other partys stake in that business. Clearly, there was a mechanism for resolving deadlock. At the moment, we do not seem to have that in the Bill.
Given that everyone apart from those in the Treasury seems to think that the Chancellor is in charge, my probing amendment suggests that we should be up front and honest and say that where there is an impasse the Chancellor will be able to direct people to use their powers.

Ian Pearson: I feel that we are going over old ground. The hon. Member for Fareham does not like the tripartite system of regulation. He clearly is not very keen on the Council for Financial Stability and wants to create some mischief about how it should operate. I think he understands our proposals on the operation of the Council for Financial Stability. We see it as a body that will work to ensure the effective co-operation of the three authorities, each of which has a role to play. As I have made very clear, the matter is not about a power hierarchy; it is about working together towards the right outcomes.
It is not surprising that people note that the Chancellor is the only one who is accountable to Parliament; nor is it surprising that people say that the Chancellor is the one responsible for the public finances. That is clear. However, it is also clear that the Bank of England is independent and has legal responsibilities that are defined in law. That is also the true of the Financial Services Authority. There will be issues on which the FSA will take a secondary role and other issues on which the Bank will take a secondary roleor, indeed, on which the Government will. That will depend on what is being discussed and what roles and responsibilities are involved. It is a fundamental misunderstanding of the council to see it as anything other than a monitoring and co-ordinating body to ensure that the tripartite organisations are working effectively together on an aligned basis.

Mark Todd: There was some evidenceI suspect that when the history is written, we will see what substance there was to thisof dissent between the Bank of England and the FSA at an early stage of the Rock crisis. It was not entirely clear how that disagreement was fully resolved. I have to say to the hon. Member for Fareham that my answer would have been rather different: there is a de facto position, which is that, in the end, the Chancellor has a responsibility to ensure a solution. However, I am not entirely sure that it is helpful to state that in the Bill. He is perhaps too optimistic in thinking that an inability to produce a resolution is a purely hypothetical argument, because I honestly think there is some evidence that it could happen and perhaps has happened.

Ian Pearson: History is often fascinating. I do not want to comment on that aspect of history, despite my hon. Friend suggesting that I might. The point I want to make in response to the hon. Member for Fareham is that, through the Council for Financial Stability, we are trying to establish an organisation that acts as an effective, co-ordinating body that brings together the three key players involved in ensuring the financial stability of the system. We want to ensure that those key players are effectively aligned and working together.
Elsewhere, we have discussed the fact that a formalised agenda will be followed and that there will be far greater transparency in how decisions, actions and discussions are minuted. That is the right approach to take. It would not be right or constitutionally correct, given the legal responsibilities of the other members of tripartite, to try to put forward an amendment in the form that the hon. Gentleman proposes. I strongly advise my hon. Friends to resist the amendment.

Mark Hoban: This debate illustrates part of the problem that we saw emerge at the early stage of this crisis. I think my interpretation of events is shared by the hon. Member for South Derbyshire. There was an opportunity to resolve the problems with Northern Rock at a very early stage, but that opportunity was lost because the tripartite authorities could not agree about the exercise of their respective powers. One player had the opportunity to extend to the inquirer some financial support, but that was not forthcoming. We do not know what other tensions there were in the system as the crisis developed.
The Minister has given the impression of cosy, happy harmony, and that might be true. I do not doubt the Ministers word, but I am sure that there have been times in this crisis where there was not that happy harmony and somebody had to say, This is what is going to happen. Unless there is some acknowledgement of the decision-making process and at what point individual players have or do not have responsibility, we are always going to be left with the question about who is in charge. That is the question that the Governor of the Bank of England was asked at the Treasury Committee. The impression that we are left with, at the end of this short debate, is actually that no one is in chargeit is a shared responsibility. It is about co-ordination; it is not about action. There is no executive power invested in the body.
Let us assume for the sake of argument that the tripartite regime continues to exist. We might get to another crisis in five or six years and go through that loop again where no one actually seems to be able to take control and the situation gets out of control because of a lack leadership and responsibility. We all want to see a system where the lines of accountability are much clearer than they are. I still do not think that we are at that point. Even if we were to assume that the tripartite authority system was to remain in place, I still think that there is a lot to be done with the tripartite system to get it to a point where people are very clear about their respective roles, responsibilities and powers. There are still some big gaps, such as the macro-prudential toolkit. We need some clarity about who is in charge at what point in the process.
The Minister is perhaps right to say that my amendment could be better drafted if I wanted to disregard the constitutional niceties. I could introduce a longer clause more akin to the sort of deadlock provisions in companies where there are some very specified circumstances for who is in charge, but until we clarify responsibilities and powers we are not going to be in a position to do that and we are still going to be left with uncertainty. The preceding clause still perpetuates the uncertainty that bedevilled the tripartite authorities at the start of the crisis, but I beg to ask leave to withdraw the amendment.

Amendment, by leave withdrawn.

Clause 2 ordered to stand part of the Bill.

Clause 3

Annual Report

Colin Breed: I beg to move amendment 29, in clause 3, page 2, line 41, leave out Treasury and insert Council.

Joe Benton: With this it will be convenient to discuss the following: amendment 30, in clause 3, page 3, line 3, leave out Treasury and insert Council.
Amendment 31, in clause 3, page 3, line 5, leave out Treasury and insert Council.
Amendment 32, in clause 3, page 3, line 5, leave out lay and insert publish.
Amendment 33, in clause 3, page 3, line 6, leave out before Parliament.
Amendment 34, in clause 3, page 3, line 7, leave out laid before Parliament.

Colin Breed: The amendments propose that it should be for the council to publish its own report, and not necessarily for the Treasury. Of course, the Treasury will have a considerable influence over what the report contains and when it is published. The amendments seek to increase the need for the council to recognise its role in financial stability. Amendments 26 and 34 propose that the council produce its own report, including publishing, rather than that being done through the Treasury. That is relatively simple, and I can imagine what the Minister will say, but by that means the council could gain the credibility, acceptability and element of transparency that it needs. In producing its own report, rather than the Treasury doing so, the council will ensure that, although other members may be consultedI am sure that that will be so and that they will probably agree to the report and may even countersign itits role will be enhanced.

Ian Pearson: There are two sets of amendments in this group: amendments 29, 30 and 31 require the council to prepare the report, as opposed to the Treasury, whereas amendments 32, 33 and 34 remove the requirement for the Treasury to lay the report before Parliament and instead require it to be published by the council.
As has been made clear previously, we are keen to improve the transparency and accountability of the current arrangements. Minuting quarterly meetings forms a key element of that strategy, as does a formal report on the council by the Treasury each year. The report will cover the activities carried out by the council and will also describe significant regulatory actions taken and future developments proposed in respect of regulatory legislation.
We think that it is appropriate for the Treasury to lead on drafting the annual report. The Chancellor is the chair of the council, which is ultimately accountable to Parliament and the public. We recognise that other council members have a vital interest in itthat is obviousbut we go back to the point that has been made previously: although the authorities will work together closely on the production of the report, ultimately the Treasury should produce the draft to ensure that it is fully scrutinised and consulted on with the bank and the FSA. Our intention is that the draft will be submitted to the council as part of its regular meetings.
I do not think that the hon. Gentlemans amendment suggesting that the council should publish the report rather than the Treasury should be agreed to, for similar reasons to those I outlined earlier. There would be a significant weakening of accountability if the report were to be published by the council, rather than allowing Parliament its proper role in scrutinising it. For those reasons, I invite the hon. Gentleman to withdraw his amendment.

Colin Breed: I guessed what the Minister was going to say and I accept that. I suppose that the Treasury Committee will wish to review the report to ensure that it does what it says it will do and will have contact with the representatives of the councils membership to ensure that it is happy with the reports contents.
The amendments are part of a suite of amendments that would enhance the role of what will be an important body. The contents of the published minutes will be much scrutinised by the financial media and will be eagerly awaited. If the report does not contain substantive information, it will be heavily criticised and the council will be all the poorer for that.
We have to wait to see what will happen. I am happy to ask leave to withdraw the amendment on the basis that I have raised these issues. We can only await the initial publication of minutes and the report to see whether the transparency the Minister says he wants actually happens. On that basis, I beg to ask leave to withdraw the amendment.

Amendment, by leave, withdrawn.

Clause 3 ordered to stand part of the Bill.

Clause 4

Definitions

Question proposed: That the clause stand part of the Bill.

Rob Marris: This is the definitions clause. I refer to clauses 2(5)(a) and 3(3)(a), both of which use the weasel words commercially confidential, which does not appear as a defined term in clause 4. I am disappointed by that but it is not unexpected because, as I say, they are weasel words used by Governments of all political parties to sweep things under the carpet, often unnecessarily. When we were discussing clause 2 and amendments 24 to 26, the Minister said that the Bill significantly improved transparency. Later in that debate he said that he would not speculate on the scenario outlined by the hon. Member for Fareham. That is the sort of difficulty that one has in trying to get information, which should be in the public domain.
I appreciate that, particularly when we are dealing with big finance, there will be commercially confidential matters that could affect shareholders or the stability of the economy, which the Bill is all about. However, to have no definition of what is meant by commercially confidential is to drive a coach and horses though the publication of anything worth while. I say again: they are weasel words, often used by Governments unnecessarily.
When I was on the Work and Pensions Committee in the previous Parliament, we had a sub-committee on the computerisation programmes that the Department for Work and Pensions was running. We got in several big suppliers, and the tenor of what several of them said was that there were matters that they as commercial entitiesprofit-making companieswould have been happy to have in the public domain but of which the Government blocked publication claiming commercial confidentiality. That is the kind of nonsense, Alice in Wonderland affair that we have when commercially confidential appears twice in the Billin important pieces of the Billand becomes what the Government say it means, because there is no definition in clause 4.
I am not going to vote in favour of clause 4 standing part of the Bill; I am going to abstain. The other definitions are fine but that lacuna is bitterly disappointing. It should be defined in the Bill and just because it is difficult to define does not mean that we should not do so. I urge the Minister to come back on Report with an amendment to clause 4 and a definition of commercially confidential.

Ian Pearson: For Labour Members, it is always worth discussing clause 4; we have done so on many occasions over the past 100 or so years of our partys history, so I am delighted to do it. It is particularly appropriate that clause 4 is about definitions. It might not be the means of production, distribution and exchange in this case but it is right that my hon. Friend refers to issues that concern him.
I do not see commercial confidentiality as being weasel words. If he is suggesting that on occasion Governments might have used commercial confidentiality as a defence for not putting things in the public domain that they perhaps ought to have done, I might have some sympathy with the view. However, I strenuously say to the Committee that there is a purpose and point to commercial confidentiality. It is extremely important that commercial confidentiality should be maintained, if used in the right way. Without commercial confidentiality, it would be impossible for the Government to do business with many businesses. I am happy to reflect on whether we should define that in the terms of reference. At this point in time, I am not particularly sited on whether the term is so sufficiently defined and used elsewhere that it is not required in clause 4, or whether it might be appropriate to be included in clause 4, but I will take advice from officials and reflect on that.

Rob Marris: I am grateful that the Minister will reflect on that. I appreciate the importance of commercial confidentiality, but he just said that that was when it was used in the right way. The problem is that there is no definition of what the Government think is the right way.

Ian Pearson: As I have said, I am happy to take away my hon. Friends point on whether we should define that in the terms of reference, but I want to make the point strongly that commercial confidentiality is important for how the Government deal with business. The Council for Financial Stability could not operate in the way we would want it to if it did not respect commercial confidentiality.
I would also like to clarify for the record the definition of international financial regulation and supervision, which is intended to include two related but distinct concepts. First, the definition includes regulation or supervision by an international body of the financial systems operating in a number of different countries or territories. An example of such a body would be one operating within the European Union. Secondly, the definition includes the regulation of the financial system of a particular country or territory outside the UK by the relevant authority or authorities in that country.

Question put and agreed to.

Clause 4 accordingly ordered to stand part of the Bill.

Clause 5

Financial stability objective

Mark Hoban: I beg to move amendment 41, in clause 5, page 4, line 10, at end add
( ) The Financial Services and Markets Act 2000 is amended as follows.
( ) In section 2, insert after subsection (2)
(2A) In discharging its general functions the Authority must, so far as is reasonably possible, act in a way that ensures that financial stability takes precedence over its other regulatory objectives..
With your agreement, Mr. Benton, I will wrap up amendment 41 and the stand part debate in the same speech, rather than having to respond to that debate later.
I was rather surprised to see clause 5 in the Bill, because we went round the tracks on the issue that it deals with during the passage of the Banking Act 2009, which gave the Bank of England a statutory responsibility for financial stability. At that time, we raised a question with the then Exchequer Secretary, the hon. Member for Wallasey (Angela Eagle): why was there not a similar objective for the FSA? We thought we would have some symmetry in that and so asked why only one part of the tripartite authority had that objective and the others did not. She was quite clear that they did have that objective, but that it was just wrapped up in market confidence.
She said that
the FSA has important objectives in relation to financial stability and the Financial Services and Markets Act 2000, which has a direct bearing on what we are talking about. For example, the FSA has a responsibility for maintaining market confidence in the financial system. That, too, is about financial stability, so it is inaccurate to say that only the Bank of England has that duty in all the laws that impinge on the area we are discussing.[Official Report, Banking Public Bill Committee, 30 October 2008; c. 232.]
That rather suggests to me that clause 5 is completely redundant. It will not change one iota of the way the FSA operates, because it should already have been acting in that way and pursuing its duties on the objective of financial stability, which was just wrapped up in a different guise. I am not sure why we have this in the first place. Perhaps the Minister will be able to illuminate why that suddenly seems a good idea.
Clearly, not everyone listened to the then Exchequer Secretary, because clause 5 has led to some discussion about whether it will actually create greater confusion in the system. The British Bankers Association seems to think that it is a cosmetic change. It stated in its submission:
While it is clear that the prudential regulator should have an explicit objective for financial stability, we would not see this as a dramatic step given that FSMA already provides that the FSA should act to maintain confidence in the financial system.
The CBI noted in its response to the White Paper:
A disadvantage of giving the FSA an explicit objective for financial stability is that this would perpetuate some of the ambiguities regarding institutional responsibilities that were apparent in the build-up to the financial crisis.
Part of the problem is that the FSA is a micro-prudential regulator as well as a business regulator, yet the financial stability objective is defined in terms of the UK financial system. It is clear from Andrew Whittakers evidence that the FSA will exercise a secondary role in the council for financial stability. Moreover, it will only exercises its powersin fact, it already has under FSMAin pursuit of any financial stability objective.
It is not clear what the clause adds to that. How is it going to get the FSA to change its behaviour? Is it really a significant change and has the FSA been acting obliviously to any financial stability objective in the past, or is it window dressinga cosmetic exercise to give the impression that the regulatory environment has been beefed up? The Government need to be clear on the clauses purpose.
Mr. Loverose

Mark Hoban: I see that the hon. Gentleman is poised to intervene. I happily give way.

Andrew Love: I thank the hon. Gentleman for giving way. Both he and his colleagues on the Opposition Benches have spent the whole day trashing the tripartite system as confused and lacking in leadership. Clause 5 offered the Opposition the opportunity to clarify through an amendment how we could overcome the situation. Why has the hon. Gentleman not taken that opportunity?

Mark Hoban: Because our approach is set out in detail in our white paper, Plan for Sound Banking. It clearly sets out, in more detail than the hon. Gentlemans party did before the 1997 general election, how we are going to reform the regulation of the financial services sector. It clearly outlines our reforms in relation to the FSA, as well as our plans to give powers to the Bank of England and to set up a new consumer protection agency. It is as good a statement of our policy as he will find.

Andrew Love: Her Majestys loyal Opposition are supposed to ensure that they play a positive role in ensuring that legislation is the best that can be achieved. I accept the hon. Gentlemans argument that his party has set out a completely separate agenda, but the amendments that the Opposition table to the Bill should be in the spirit of the legislation. As a loyal Opposition, should the hon. Gentleman and his colleagues not have made the effort to make the Bill the best it could possibly be?

Mark Hoban: There are two approaches, but I am not sure which one the hon. Gentleman is espousing. The amendments that we have tabled seek to improve the existing regulatory structure and to provide line-by-line scrutiny. That is our role when discussing legislation. As I said this morning when the hon. Gentleman made a similar point on clause 1, if it was not for the time constraints we could spend a lot of time talking about our reforms. In fact, I have spent a lot of time talking about them today, but, equally, we should spend a lot of time trying to improve the Bill through line-by-line scrutiny, to clarify what it means and to understand the purpose of introducing the new objective. If the hon. Gentleman is keen to experience what it is like to be the loyal Opposition, maybe tables will be turned at some point and he will be able to see for himself what it is like to go through line-by-line scrutiny.
I come back to my question. What is the point or purpose behind including clause 5 in the Bill, given that the then Exchequer Secretary, the hon. Member for Wallasey, said that financial stability was already within the FSAs remit through the market confidence clause? Some commentators say that this is merely a cosmetic change. Some go further and say that it causes additional confusion, given that the Bank of England has a financial stability objective. The Government need to make a clear argument on why it is necessary in the Bill, given the assurances made during the passage of the Banking Bill last year.
Through amendment 41, we seek to understand what priority financial stability has among the other objectives that the FSA will have. The Bill will change the FSAs objectives; it will lose its public awareness remit but will gain a financial stability objective and a duty relating to international co-operation. There is a potential tension between the financial stability objective and some of the other objectives that the FSA will have. I want to understand if the Ministers argument is that the objectives all rank equally, or whether financial stability is to take precedence over other objectives.
Let me give the Committee an example. During the crisis on Northern Rock, the FSA could have, as part of its public awareness role, reminded people about the limits to the protection on deposits and encouraged them to move their deposits out of Northern Rock and into somewhere else. Alternatively, it could have said, from a financial stability perspective, that it did not want consumers to move their deposits out of Northern Rock but wanted them to stay there. There is a tension between the public awareness roleexplaining the limits of the Financial Services Compensation Schemeand the financial stability role. Which should take precedence in that situation?
Let us look at a non-banking areathe mis-selling of pensions. There was a significant liability attached to pension mis-selling that could have had an impact on financial stability. If the liability were significant, it could have eroded the stability of insurance companies and had a wider impact on the UK economy. However, the FSAs consumer protection remit suggests that it was right for the FSA to take action where it found examples of mis-selling and to ensure that compensation was paid. A similar argument could be applied to the recent debate about finding a solution to the bank charges issue, notwithstanding the fact that that is outside the FSAs remit. There is clearly a financial stability impact if banks have to pay out many billions of pounds in compensation to consumers, but there is a consumer protection angle that should be borne in mind. A balancing takes place when regulatory decisions are taken by the FSA. Amendment 41, which I tabled, suggests that precedence should be given to financial stability where there is a conflict in trying to reconcile those various objectives, when it comes to the regulatory decisions that the FSA needs to make. It is a probing amendment to clarify the Governments thinking on the importance of financial stability for the FSA. It simply flows from my wondering why we have such an objective in the Bill, given that we were assured last year that it was unnecessary.

Ian Pearson: I am pleased to hear that amendment 41 is a probing amendment; it could be very dangerous if agreed to, and it could lead to all sorts of hopefully unintended consequences. I say hopefully unintended because I cannot believe that the hon. Member for Fareham really wants to put the interests of financial stability above the interests of protecting consumers who have retail deposits or investments in financial markets.
Let me make a few more general comments about the clause before referring specifically to the amendment. The Governments view is that, given the growing international consensus that both national and international regulators should enhance their focus on systemic risks to financial stability, we believe that it would be desirable for Parliament to set out more explicitly in legislation the priority that it expects the FSA to attach to the issue. That is what clause 5 does.
With regard to the hon. Gentlemans point about the comments that my hon. Friend the Member for Wallasey made during the passage of the Banking Act 2009, it remains the Governments view that the FSA currently has the statutory objective of maintaining confidence in the financial system, which was provided for in the Financial Services and Markets Act 2000. Protecting financial stability is, of course, a fundamental component of maintaining confidence in the financial system.
However, we believe that the FSAs objectives should contain a more explicit recognition of the role that the FSA has to play in protecting and enhancing stability. Clause 5 makes it clear beyond reasonable doubt that protecting and enhancing stability is an objective of the FSA. It will provide express legal authority for the FSA to take action to support financial stability, including using its rule-making powers and other powers, which we will no doubt come to when we discuss clause 7.
I want to emphasise that the FSA is not the only body responsible for protecting and enhancing financial stability. The term contributing to in subsection (1) of proposed new section 3A reflects that. Financial stability is affected by many factors, which, as we have already discussed at some length in our debates on the new Council for Financial Stability, fall within the scope of the responsibility of each of the councils members. I do not think that I need to go into further detail about that.
Regarding the amendment proposed by the hon. Member for Fareham, I am not convinced that it would be beneficial for the FSA to be required to give financial stability priority over its other objectives. That might have the effect that consumers and others, including the firms regulated by the FSA, would never again take the other objectives seriously. It is even possible to imagine that the perception that stability is being prioritised might itself harm stability. If consumers felt that their protection was no longer a key priority for the FSA, that would undermine their confidence in the financial system and the firms that make up that system. It would not be right to impose too rigid an approach on the FSA. What we need is a carefully calibrated and sensible approach. A rule that says that stability must always take precedence could be damaging.
For the amendment to have a benefit, we must try to imagine situations in which a possible course of action might benefit stability but damage consumer protection. For example, a weak bank might be encouraged to treat its customers unfairly in order to make excess profits to bolster its capital position. If that happened, or if customers of a firm thought that it was happening, rightly or wrongly, they would presumably withdraw their deposits and place them in a different bank, thereby weakening the bank that the unfair initiative was intended to strengthen. It is difficult to understand in what situation there is likely to be a conflict between financial stability and consumer protection. I do not believe that having a priority for financial stability over consumer protection is in the interests of consumers, or that it is in the interests of financial stability overall.
In the Governments view, it is right for the FSA to be required to contribute to the protection of financial stability. In the context of that objective, it is right that it be required to balance the risks caused to the economy by instability against excessive caution, as mentioned in subsection (2)(a) and (b) of proposed new section 3A. It is also correct that the FSA will have to consider carefully the way in which various possible actions affect all its fundamental objectives. I do not believe fundamentally that giving rigid, explicit priority to financial stability is beneficial or helpful. Indeed, it might even be harmful for the reasons I outlined. I urge the hon. Gentleman to withdraw the amendment.

Mark Hoban: I am grateful for the Ministers response. There were clearly some words of wisdom that he glossed over quickly, given the reluctance to have further lengthy scrutiny of the clause. I think that he is saying that clause 5 makes explicit what is implicit in the FSAs existing remit on market confidence. That suggests that the change is largely cosmetic, but the position is clear.
On the amendment, even if the Bill does not give financial stability explicit precedence, we cannot escape the fact that regulators make trade-offs in juggling the objectives. We had a long debate about the priority of various objectives in the context of banking, and the Minister gave good arguments for why we should not give precedence to one objective. However, just because we do not lay that out in statute, it does not mean that when looking at individual cases, the regulator does not balance the application of the objectives to the regulatory decision it is making. Perhaps sometimes there is a compromise on one objective at the expense of achieving another. We should recognise that part of making regulatory decisions is striking a balance between the objectives. I accept that.
We currently place great store on financial stability as a consequence of the financial crisis. It is now much higher up peoples lists. When we talk to people about what outcomes they want for financial services, they choose security, stability and continuity. When times change, people at all levels of financial services will again get an appetite for risk, and stability will be less of a factor in their decisions. It is right to give regulators freedom to decide what are the appropriate objectives at the time and what is important in the context. Let nobody be under the illusion that regulators do not have to make trade-offs from time to time in pursuit of their regulatory functions. With that, I beg to ask leave to withdraw the amendment.

Amendment, by leave, withdrawn.

Ordered, That further consideration be now adjourned. (Mr. Mudie.)

Adjourned till Thursday 7 December at Nine oclock.